Net Operating Losses

For many years, thanks to the net operating loss (NOL) provisions, the tax code gave you quick cash in your pocket if you had an overall net loss in a tax year.

Unfortunately, starting in 2018, the Tax Cuts and Jobs Act (TCJA) took away your ability to get almost instant benefit from your NOL.

Now, due to the COVID-19 pandemic, Congress temporarily restored your ability to get fast cash from your net operating losses—even losses incurred in prior years (2018 and 2019).

NOL Defined

You have an NOL when certain deductions exceed your gross income.

An NOL generally occurs when you have a net business loss for the tax year.

Example. John has a Schedule C loss of $40,000 and $10,000 in wage income from a part-time job. John’s NOL is $30,000.

COVID-19 Temporary NOL Rules

The CARES Act suspends the TCJA limitations on your NOLs for tax years beginning in 2018, 2019, and 2020, which means you can

  • carry back your NOL five years and carry it forward indefinitely, and
  • apply 100 percent of the loss.

You can also elect to waive the carryback and only carry forward the NOL.

Claiming Your Refund

The best way to claim a refund from an NOL carryback is to use the “tentative refund” procedures by filing either

  • Form 1045, Application for Tentative Refund, or
  • Form 1139, Corporation Application for Tentative Refund.

If you qualify to use these forms to claim your refund, you get two benefits:

  1. The IRS makes only a limited examination of the claim for omissions and computational errors.
  2. You receive your cash refund within 90 days of filing your application.

Normally, to qualify to use this procedure, you’d need to file your application no later than 12 months after the end of the tax year in which your NOL arose. Therefore, for NOLs on a 2018 Form 1040, you’d normally be out of luck, as the deadline was December 31, 2019.

But the IRS has given you mercy: you have a six-month extension to file your Form 1045 or Form 1139 if you have an NOL that arose in a tax year starting in 2018 and that ended on or before June 30, 2019.

For example, if your NOL was on your 2018 Form 1040, you now have until June 30, 2020, to file Form 1045. You’d better hurry!

Qualified Improvement Property (QIP)

Congress made an error in the Tax Cuts and Jobs Act (TCJA) that limited your ability to fully expense your qualified improvement property (QIP).

The CARES Act fixed the issue retroactively to tax year 2018.

If you have such property in your prior filed 2018 or 2019 tax returns, you likely have no choice but to correct those returns. But the bright side is that the corrected law gives you options that enable you to pick the best tax result.

What Is QIP?

QIP is any improvement made by the taxpayer to the interior portion of a building that is non-residential real property (think office buildings, retail stores, and shopping centers) if you place the improvement in service after the date you place the building in service.

The CARES Act correction added the “made by the taxpayer” requirement to the definition.

QIP does not include any improvement for which the expenditure is attributable to

  • the enlargement of the building,
  • any elevator or escalator, or
  • the internal structural framework of the building.

QIP Problem

Due to a TCJA drafting error in the law, Congress made QIP 39-year property for depreciation purposes and ineligible for bonus depreciation.

Unusual twist. This drafting error did not affect expensing under Section 179. Under the TCJA, you could have elected to expense some or all of your QIP with Section 179.

But now you have to revisit your previously filed 2018 and 2019 tax returns and consider 100 percent bonus depreciation, 15-year depreciation, and Section 179 expensing.

QIP Solution

The CARES Act made QIP 15-year property and made it eligible for bonus depreciation retroactively as if Congress had included it in the TCJA when it originally became law.

This change requires you to take a one-time, lump-sum bonus depreciation deduction for the entire cost of your QIP in the tax year during which you place the QIP in service, unless you elect out.

If the QIP lump-sum deduction creates a net operating loss (NOL), you can carry back that loss to get almost immediate cash.

We Are Here for You

If you need any help with any of the COVID-19 tax laws, please call me. on my direct line at 909-238-5803.

Serving all of California since 2001