What is NOL Loss Carryback?

NOL Loss Carryback

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NOL Loss Carryback

A Net Operating Loss (NOL) Carryback refers to the process by which businesses can apply their net operating losses (NOLs) to previous tax periods, leading to a potential refund for taxes paid during those periods. This process allows businesses to smooth out their income and therefore their taxes, which can be particularly helpful in years when they experience significant losses.

The carryback period in which the NOL can be applied varies depending on the specific tax law of the country or the state. In the United States, the Tax Cuts and Jobs Act (TCJA) of 2017 initially eliminated the carryback provision for NOLs arising in tax years ending after December 31, 2017, allowing such losses to only be carried forward indefinitely.

However, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, temporarily reinstated the NOL carryback provision. For NOLs arising in tax years 2018, 2019, and 2020, businesses could carry back the losses to the previous five tax years to offset taxable income and potentially secure a refund of previously paid taxes. This change was made to provide immediate liquidity for businesses during the COVID-19 pandemic.

It’s important to note that tax laws are subject to change, and the specifics can vary by jurisdiction. Always consult with a tax professional for the most accurate and current information.

Example of NOL Loss Carryback

Let’s walk through an example of a net operating loss (NOL) carryback using hypothetical figures:

Let’s say XYZ Company, a U.S. corporation, reported a net operating loss of $500,000 in the year 2020 due to significant unexpected expenses and reduced operations caused by the COVID-19 pandemic.

However, in the previous five years (2015 to 2019), the company was profitable and had paid income taxes on its profits. Let’s assume the company had a taxable income as follows:

  • 2015: $200,000
  • 2016: $150,000
  • 2017: $300,000
  • 2018: $400,000
  • 2019: $500,000

Under the provisions of the CARES Act, XYZ Company can carry back its 2020 NOL of $500,000 to offset its taxable income in one or more of the five preceding tax years.

Typically, the company would first carry back the NOL to the earliest year within the carryback period where it had taxable income, which is 2015 in this case. The $200,000 taxable income in 2015 can be entirely offset by a portion of the 2020 NOL, leaving $300,000 of the NOL to carry back to 2016 and subsequent years.

After completely offsetting the $150,000 income in 2016, the company still has $150,000 of the 2020 NOL left, which it can then apply against its 2017 taxable income.

After these carrybacks, the company has offset $500,000 of previous taxable income with the 2020 NOL. The company can then file amended tax returns for these years and potentially receive a refund for some or all of the income tax it paid for those years.

This is a simplified example and the actual process involves specific rules and regulations. Also, remember that tax laws can vary by jurisdiction and can change over time, so businesses should consult with a tax professional for advice tailored to their specific situation.

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