Are You Entitled to a Tax Refund? The CARES Act May Allow Your Business To Take More Net Operating Loss Deductions and Boost Cash Flow

The CARES Act provides a number of tax benefits designed to provide relief and improve short-term cash flow for both corporations and individuals. Among them is Section 2303 – Modifications for Use of Net Operating Losses. This is an important concept, and will likely prove to be a valuable tax change that substantially benefits many businesses who have been economically damaged by the coronavirus.

BLUF (Bottom Line Up Front)

If your business incurred a net operating loss (NOL) in 2018 or 2019, or incurs an NOL in 2020, you can now ‘carry back’ those losses for five years.

This means that you may be able to effectively reduce your taxable net income in prior years. This would mean your tax liability for those years is reduced, as well. In Turn, the new rules for net operating losses would allow you to receive a tax refund for the prior years in which you overpaid taxes.

Administrative details are still being worked out. The precise mechanisms by which you can receive a refund or credit are to be determined. Email us at WeCare@JFDIAccountants for more details, and to get on our email list, so you can receive regular updates as the IRS irons out the fine points.

These refunds will provide much-needed operating capital for many businesses who have been affected by the coronavirus, or who have encountered difficulties or booked losses in the last two years, or who will do so in 2020.
Note that to benefit from the new net operating loss carryback provisions, you must have had some profitable years in the recent past for which you reported income. That’s because you need to apply the net operating loss against actual earnings.

If your business lost money in 2018 or 2019, I encourage you to call me to discuss finding these newly-available deductions for prior year tax returns, and strategies to maximize the benefit of this valuable tax break going forward.

Background

Before 2018, taxpayers who incurred a net operating loss had to apply those losses against income received over the previous two years – potentially generating a refund from the IRS.

Only NOLs that could not be applied against the two prior years’ income could then be carried forward to offset earnings in future years. At the time, taxpayers could carry forward unused NOLs for up to 20 years.

The Tax Cuts and Jobs Act changed those rules beginning in 2018. Specifically, it prohibited carrying back losses to previous tax years. The TCJA allowed taxpayers to carry their net operating losses forward indefinitely, but limited the amount you could use to offset income to 80% of income.

The CARES Act

The CARES Act allows most corporations* to carry back NOLs for up to five years prior to the tax year in which the loss occurred. You should start with the earliest of those five years, and work your way forward. The additional deduction against income should generally result in a reduced tax liability for those prior years – and consequently generate a refund of some taxes you already paid.
*Exception: real estate investment trusts. REITs can’t carry back losses, and you can’t carry back losses to any year in which your company was a REIT.

Additionally, the CARES Act also eliminates the TCJA’s 80% of income cap on how much earnings you could offset with net operating loss carryforwards. You can now apply NOL carryforwards from tax years beginning January 1, 2020 and earlier to offset up to 100 percent of future years’ earnings
The 80% offset cap comes back again (with a few small alterations) for tax years beginning after December 31st, 2021.

This benefit is especially valuable for C corporations, because the C Corporation tax rate was much higher prior to 2018: about 35%, as opposed to a top rate of 21% after the Tax Cuts and Jobs Act took effect in 2018. The higher tax rate means deduction opportunities prior to the TCJA are much more valuable than they are in 2018 and later.

Note: The CARES Act doesn’t change the rules for capital losses. Only the rules regarding the taxation of income. You still carry back capital losses for three years and forward for up to five years.

Watch for knock-on effects

Note that carrying back NOLs to offset income in prior years can have indirect knock-on effects on other parts of that year’s tax return. For example, it could affect the general business credit, or your business’s ability to deduct charitable contributions (Section170(b)(2)(A)), which is capped at 10% of taxable income. Taking a significant NOL carryback effectively reduces taxable income for that year, which could affect a charitable contribution deduction.

If you’ve already filed your 2019 return and you have net operating losses, and you and your tax advisor believe that taking advantage of these expanded carryback provisions will be beneficial, you should file an amended return as soon as possible. If you have not yet filed your 2019 return, you should revise it before filing to reflect your NOL, and carry it back over five previous years if relevant.

JFDI Accountants can use these and other strategies to help you maximize your current cash flow as you navigate the coronavirus crisis.

Coronavirus Student Loan Relief

The federal government is providing sweeping relief to most federal student loan borrowers. The CARES Act provided a number of breaks for student loan borrowers, who collectively now owe $1.6 trillion in federally-guaranteed student loans.
Payments are halted through September 30th, 2020, and interest rates have temporarily been set to zero through the same period. See below for details.

It’s important to note that these provisions apply only to federally-guaranteed student loans offered under the auspices of the U.S. Department of Education. They do not apply to private student loans, loans still owned by educational institutions directly, and U.S. Department of Health Loans.

Automatic Forbearance Through September 2020

First, the Department of Education announced that automated payments for the vast majority of federally-guaranteed student loans ceased as of March 13th, 2020. All federal student loan borrowers are automatically placed in administrative forbearance. No payments are required until October 2020, according to the Department of Education.

Wage garnishments for delinquent borrowers are suspended as well.

Auto-Debit Payment Refunds Available

If your loan servicer inadvertently processes any auto-debit payments on federal student loans covered by this policy between March 13th and September 30th, 2020, they will refund them to you upon request. Contact your loan servicer directly to make the request.

Federal Student Loan Interest Temporarily Set to Zero

You can continue to make payments if you choose, but there’s not much reason to do so: Under Section 3513 of the CARES Act, Interest on most federal student loans is suspended as well through the end of September.

Specifically, the interest rate is being temporarily set at 0% for these loan programs:

Direct Loans
FFEL Program Loans
Federal Perkins Loans

Not All Loans Covered

Some Perkins and FFEL loans are still owned by the educational institutions, not the federal government. Those loans are not included in either the CARES Act’s provisions, the zero-interest provision or the Department of Education’s moratorium on auto-debit payments.
In most cases they are able to work with you if your income was disrupted by the coronavirus. Contact the educational institution that holds your loan for more information.

Find Your Servicer

To verify that your loan is eligible for these benefits, contact your loan servicer online or by phone. If you don’t know who services your loan, visit StudentAid.gov/login or call 1-800-4-FED-AID (1-800-433-3243).

If you are hearing impaired, call 1-800-730-8913 for the TTY line.

Public Service Loan Forgiveness Program Considerations

If you’re enrolled in the Public Service Loan Forgiveness Program (PSLF), you will still receive credit for the time spent in administrative forbearance, just as if you were actively repaying the loan on time. However, you must remain employed full time with a qualifying government or non-profit employer to keep making progress.

Income-Driven Repayment (IDR) Plans

If you are enrolled in an income-driven repayment plan, such as PAYE, REPAYE or IBR, you will still continue to make progress even while your loan is in administrative forbearance. You will not be penalized or lose eligibility for eventual IDR forgiveness just because your payments are in deferral.

If your income remains reduced in October, contact your servicer for more options.

Loan Rehabilitation

If you have a loan in rehabilitation, you will not be penalized if you stop paying between March 13th and September 30th, 2020. You will get credit for your nine months of payments required to rehabilitate a federal student loan just as if you had been making your rehab payments as originally scheduled.

Tax Benefits for Employers

Thanks to the CARE Act, employers may now temporarily deduct payments made to employees in the form of student loan repayment assistance. The measure expires in 2021. Student loan reform advocates have long advocated bringing employer student loan repayment contributions on an equal tax footing with tuition assistance benefits and 401(k) matching contributions, both of which are generally tax deductible to the employers — and non-taxable to the employee, as well.

The student loan repayment assistance deduction is limited to $5,250 per year per employee — the same cap as tuition assistance benefits have had for years.

Although the measure expires next year, this benefit may prove quite popular in an election year. Congress could extend the tax deductibility of employer student loan repayment assistance in the future.