BY EDMUND E. BROBESONG
In general, a taxpayer may deduct net operating losses carried back or net operating losses carried over from other tax years. However, the net operating loss deduction cannot exceed taxable income for the current year. For net operating losses arising in tax years beginning after Dec. 31, 2017, the deduction is limited to 80% of taxable income for the current year.
NOL must be carried over indefinitely until the NOL is utilized. However, NOLs arising in tax years beginning before Jan. 1, 2018, may be carried back two years or carried over 20 years. Furthermore, the taxpayer may elect to forgo the carryback period and instead carryover the NOL for 20 years. NOLs arising in tax years beginning before Jan. 1, 2018 are not subject to 80% taxable income limitation.
A corporation is generally subject to income tax equal to 21% of taxable income. However, for tax years beginning before Jan. 1, 2018, graduated income tax rates ranging from 15% to 35% applied to corporations. Because the 35% tax rate applied only to taxable income above $10,000,000, most taxpayers in Guam would be subject only to the 34% tax rate. Thus, for 2018 and subsequent years, the tax rate would be 21%. However, for 2017 and prior tax years, the tax rate would be 34% (assuming taxable income was $335,000 or more and not more than $10,000,000).
On March 27 the Coronavirus Aid, Relief and Economic Security Act or CARES Act became United States Public Law 116-136. Section 2303(b) of the CARES Act amended the NOL provisions of the Internal Revenue Code. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2021, a taxpayer shall carryback NOLs to the five taxable years preceding the taxable year in which the NOL arises (“carryback period”). Furthermore, NOLs arising in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2021 shall not be subject to the 80% taxable income limitation.
For a calendar year taxpayer, the tax benefit of an NOL arising in 2018, 2019, or 2020 would be 21% if the NOL were carried forward. However, the tax benefit of such a NOL would be 34% (or even 35%) if the NOL were carried back to 2017 or prior tax year. Clearly, the tax benefit of an NOL carryback to 2017 or prior tax year is more valuable than the tax benefit of an NOL carryover. Because of the economic impact of the coronavirus, it is likely that businesses will report losses for 2020. In this case, such taxpayers should make sure to file the necessary tax refund claims to carryback the 2020 NOL to 2015 (or other appropriate tax year).
However, if taxpayer does not want to carryback the 2020 NOL, then such a taxpayer should make sure to file the necessary election to forgo the carryback period. Absent such an election to forgo the carryback period, the NOL will automatically be carried back and if the refund claim for the NOL carryback is not timely filed, then the NOL may be lost (because the NOL carried back is used up regardless of whether a refund claim is filed). mbj
— Edmund E. Brobesong is the senior manager of the tax group at Ernst & Young, Guam. He can be reached at [email protected].