It is inevitable for businesses to go through financial deficits and worse, losses. Business owners do their best to stay afloat and be able to weather the storm of having business losses. There are bills to pay, there is the payroll and most especially, the continuity of the business itself should be prioritized. However, disasters may strike. Things that not anyone can control. A business owner may have planned everything, from the operations to marketing and handling financial obligations, but all this planning can still come down with losses as reflected in one’s financial statements. This can sometimes be attributed to either internal or external problems, which can be controlled or uncontrolled. The world is going through a pandemic now which struck many businesses. Many were forced to close down to follow government guidelines to lessen the spread of COVID-19. No one imagined that this would happen and most importantly, no one could have planned for such a disaster.
What business owners have to do is prepare and at the same time, know what to do when losses are incurred. How can they recover from all these?
One of the many things that a business owner should consider is the Business Loss Tax Refund or the NOL Rule. We all have our contributions to society and it is a must for us to pay our due diligence, which is called taxes. This is the lifeblood of the Government and it is a bigger liability if we do not do our part. However, there are remedies available for business owners to relax this rule and help them recover from their unprecedented losses. Here are ten things that you must know about the Business Loss Refund.
1. The Business Loss Refund can be read in the CARES ACT
The Coronavirus Aid, Relief, and Economic Security Act or the CARES Act is the law allowing business owners to get a tax refund from the business losses that are incurred in the years indicated in the law. This introduced changes in the tax law which is of great help to businesses who have paid taxes in the past despite incurring losses. This is a law that is needed now more than offer because the small business who have greatly contributed to the economy, now needs help to sustain themselves. The CARES Act was signed into law on March 19, 2020, by former president Donald Trump.
2. The NOL Rule
NOL means Net Operating Loss. The NOL rule means your annual tax deductions for a particular year are greater than your annual taxable income. This can be attributed to your business losses. As an example, in the year 2019, Business A earned an $80,000 income but had a tax liability of $100,000. The $20,000 difference is the Net Operating Loss. This is an amount that is important for business owners to reclaim to keep their business running and help them rise up amidst the crisis that everyone is currently going through.
3. Why the NOL Rule in the CARES Act is important
The NOL rule is important in the CARES Act because it allows business owners to carry back losses they incurred in the year 2018, 2019, and 2020. This means you can file amended Tax Returns dating as early as 2018 and file a refund of all the tax liabilities fulfilled in the said year. Business owners can have the opportunity to reclaim what they have paid in taxes as a form of refund. If you are suffering losses because of the government-mandated lockdown where your income is heavily affected and the business is operating in shambles, then this is a great opportunity for you.
4. Sole Proprietors or Single-Member LLCs
Sole proprietors, partnerships, and S-Corporations are the types of businesses that can avail of this benefit. However, this may vary especially with partnerships and S-Corporations that have multiple owners. Since partnerships share in the gains and losses of their business based on their contribution, this is the same with the declaration of NOL. This is attributed to their individual income tax returns. The same is true for S Corporations.
For sole proprietors or single-member LLCs, this could be more convenient given the fact that there is only one owner who bears the gains and losses of the business. Of course, it would be more detrimental for the business owner to weather the storm of having business losses, but in tax benefits like the NOL rule, tax refunds are more probable.
5. The process of filing for a Business Loss Tax Refund
The process of filing for a Business Tax Loss Refund can be tedious. The computation of the Net Operating Loss is not as simple as just determining the gross amount of annual earnings against an annual tax liability. There is the Annual Gross Income which has many variables. There is also the use of Form 1045 for the Application for Tentative Refund or Form 1404X in filing an amended tax return for the specific year the business has incurred losses.
It is advisable for business owners to consult with their preferred tax professional to come up with a more convenient application for the Business Loss Tax Refund.