Net Operating Losses – How NOLs Benefit Businesses’ Tax Burdens

April 25, 2022
Net Operating Losses – How NOLs Benefit Businesses’ Tax Burdens

New Rules on Net Operating Losses: How They Could Affect Your Taxes.


Net operating losses (NOLs) are tax deductions that allow you to offset taxable income with losses from your business. In other words, an NOL helps firms make up for years when they lose money by reducing their tax burden. NOLs have been around a long time, and you can carry them back or forward to reduce taxes in previous or following years.


Why are Net Operating Losses Helpful?


They’re beneficial because they lower your overall tax liability if your business had a bad year or two. You could use an NOL to save on taxes even if you made $100,000 the following year by carrying it forward or back two years, depending on whether you were in a higher tax bracket. The deduction amount depends on how much your business lost during the year in question and what claim-filing limitations apply (more on this later).


Before 2018


Before 2018, many taxpayers could use net operating losses to lower their taxes in several ways. For example, they could carry back their losses and get refunds for taxes paid in prior years. The losses also could be carried forward for up to 20 years to offset future income.

Under Section 2303 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), taxpayers could carry back taxable income or loss from 2018, 2019, and 2020 for up to five years. It was important because it provided much-needed cash flow relief for taxpayers during the COVID-19 pandemic.

However, new legislation eliminates this exception. Taxpayers will no longer be able to carry back NOLs from tax years 2018 and later.


Operating Losses are Now Less Generous, but They Still Can Help


It can be hard to know where to start and end when running a business. One of the most important things for your business is identifying whether you have any losses that you can use to reduce your taxes. When companies restructure or close their doors, they pay taxes on their losses.

The new rules for operating losses make it more difficult for you to use these losses. However, they may still help reduce your overall tax burden. It’s essential to ensure that you take full advantage of all the tax benefits available to you and your business.


Get Tax Advice to Help Grow Your Business


It is essential to work with an experienced CPA in tax and accounting to help avoid costly mistakes, get the most out of any tax benefits available, and keep you on top of changing tax rules. It will help in ensuring your business is getting what it deserves.

A professional can also assist with year-end planning by looking at the current year’s financial results versus prior periods and ensuring you are doing what is needed to minimize taxes. If you would like assistance with your tax planning needs, don’t hesitate to contact us today!