What is a Net Operating Loss (NOL) Carry Forward and Carry Back?
A net operating loss (NOL) occurs when your deductions for the year are more than your gross income. An NOL year is the year in which an NOL occurs. You can use an NOL by deducting it from your income in another year or years. This reduces the taxable income for the year.
You Can “Carry Forward” or “Carry Back” an NOL
Before 2017, NOLs could be carried back two years and carried forward 20 years. The Tax Cuts and Jobs Act (TCJA) changed these rules. Here’s an overview of those changes.
In 2017, the TCJA changed NOL rules so that most taxpayers no longer have the option to carry back a net operating loss (NOL). For most taxpayers, NOLs arising in tax years ending after 2020 can only be carried forward.
In 2020, the CARES Act made some temporary changes to NOL rules. NOLs generated in 2018, 2019, and 2020 and be carried back up to five years. This five-year period is known as the carryback period. You can then carry forward any remaining NOL indefinitely. This is known as the carryforward period. Additionally, for these three tax years you can elect to forgo the carryback and only carry forward these NOLs.
The Tax Cuts and Jobs Act (TCJA) and NOL
The TCJA has also substantially impacted some of the other rules for NOLs. For tax years 2018, 2019, and 2020 you can use 100% of an NOL and reduce the tax liability to zero. Beginning in 2021, you can only use up to 80% of the NOL. However, eligible taxpayers can use the R&D tax credit to close this gap.
What is the R&D Tax Credit?
The Research and Development (R&D) Tax Credit is designed to keep top talent and innovation thriving in the United States. This credit is an incentive that rewards companies who continue to innovate within their business industry. There is no requirement that your company’s R&D needs to be revolutionary to the world. Projects and initiatives that are evolutionary, or incremental to your business, can also qualify. In addition to the federal credit, many states now offer similar incentives for R&D. For more information on the R&D tax credit, visit our research and development tax credit page.
Is Your Business Eligible for R&D Tax Credits or NOL Carrybacks?
Changing laws around the R&D tax credit can make it difficult to figure out if your business is eligible to claim the credit. Business owners can contact our R&D tax credit team for more information.
C corporations, individuals, estates and trusts, and tax-exempt organizations with unrelated business taxable income can generally take advantage of the CARES Act NOL carryback. Partnerships and S corporations may be able to take advantage of the CARES Act NOL carryback, but there are different rules for passthrough entities.
How Valuable Can These Opportunities Be for Your Business?
Using the R&D tax credit and NOLs in conjunction can help you extend the time before your business needs to start paying taxes. For example, if you have $500,000 of taxable income in 2022, and $1,000,000 in carryforward NOL from 2021, you can only use $400,000 to offset your taxable income. However, if your business is eligible to take the R&D tax credit, you may be able to reduce the outstanding tax burden.
Getting Support with Net Operating Losses or R&D Tax Credits
Contact our research and development team for more support in claiming R&D tax credits and determining your net operating loss strategy.