2021 Tax Loss Nightmare: Return of the TCJA NOL Rules

Tax Planning

When Congress passed the Tax Cuts and Jobs Act (TCJA) back in 2018, it reduced your ability to make use of your tax losses.

Due to COVID-19, Congress retroactively suspended these changes for tax years 2018, 2019, and 2020.

But now it is 2021, and the reprieve is over: we are back to the TCJA rules that’ll hit your wallet if you have a tax loss.

We’ll explain the rules that apply to your tax losses starting in tax year 2021 and how you can get immediate value from them—yes, there are still ways to do that!


What Is an NOL?

You have a net operating loss (NOL) when your business deductions exceed your business income.

You’ll most often see an NOL when you have a net business loss for the tax year.

Example. Laura has a Schedule C loss of $60,000 and $20,000 in wage income from a part-time job. Laura’s NOL is $40,000.


Pre-TCJA Rules

For NOLs that arose in tax years beginning in 2017 and prior,

  • you’d carry back your NOL two years and then carry it forward 20 years if not fully used by the carryback, and 
  • your NOL could offset up to 100 percent of your taxable income.

Under the 2017 and prior rules, you could elect on a timely filed return plus extensions to waive the carryback and only carry forward the NOL

Under the 2017 and prior rules, the NOL carryback allowed you to get an immediate refund of cash from a prior tax year.

Example. If Laura’s $40,000 NOL arose during tax year 2017, she had two options:

  1. Carry the $40,000 NOL back to tax year 2015 to get a refund, and if she does not fully use the NOL, then she carries it to tax year 2016 and future years, or
  2. Waive the carryback on her timely filed 2017 Form 1040 and carry the $40,000 NOL forward to tax year 2018, where it could offset up to 100 percent of her 2018 taxable income.


CARES Act Applies in 2018, 2019, and 2020

The CARES Act suspended the TCJA limitations on your NOLs for tax years beginning in 2018, 2019, and 2020. Under the CARES Act rules

  • you can carry back your NOL five years and carry it forward indefinitely if not fully used by the carryback, and
  • your NOL can offset up to 100 percent of your taxable income.

Under the CARES Act rules, you can elect to waive the carryback and only carry forward the NOL.

For tax years beginning in 2018 or 2019, there is a special process for you to make the carryback waiver election:

  • You must make this election on your timely filed tax return for your first tax year ending after March 27, 2020.
  • You must attach a separate statement for each tax year that you are waiving the NOL carryback, and the statement must say that you elect to apply Revenue Procedure 2020-24.

Example. If Laura’s $40,000 NOL arose during tax year 2019, then Laura had two options under the CARES Act:

  1. Carry the $40,000 NOL back to tax year 2014 to get a refund, and if she does not fully use the NOL, then she carries it to tax year 2015 and future years, or
  2. Waive the carryback no later than her timely filed 2020 Form 1040 and carry the $40,000 NOL forward to tax year 2020, where it can offset up to 100 percent of her 2020 taxable income.


Tax Year 2021 and Forward Rules

You are now stuck with the TCJA rules for NOLs starting in tax year 2021.

The TCJA rules are not in your favor:

  • You cannot carry back your NOL, but you can carry it forward an indefinite number of years, and
  • Your NOL can offset only up to 80 percent of your taxable income before your 20 percent Section 199A deduction.

The TCJA changes take away your ability to get immediate tax savings from your business losses.

Example. If Laura’s $40,000 NOL arose during tax year 2021, she is subject to the TCJA rules and her only option is to carry the NOL forward to tax year 2022, where it can offset up to 80 percent of her 2022 taxable income.


Use Your NOL Now

Since you can’t carry back your NOL, you must be proactive to get immediate value from your loss. Consider these five strategies to create taxable income and lock in your loss immediately:

  1. Convert your traditional IRA to a Roth.
  2. Take a taxable traditional IRA distribution if you are not subject to penalties for early withdrawal.
  3. Offset depreciation recapture on the sale of vehicles and other equipment.
  4. Accelerate income into 2021.
  5. Fix depreciation errors that increase your taxable income.

In addition, you can reduce your estimated tax payments for the next tax year to advance yourself the value of your

future NOL deduction.

Example. If Laura’s $40,000 NOL arose during tax year 2021, she must carry it forward to tax year 2022. Let’s assume that the 2022 NOL deduction would decrease Laura’s 2022 tax liability by $10,000. She can reduce her 2022 estimated tax payments by $10,000 to get cash in her pocket during 2022, before she files her 2022 tax return in 2023.


Takeaways

In tax year 2018, the TCJA took away your ability to get immediate benefit from your NOLs.

But then Congress temporarily stepped in with the CARES Act and paused the TCJA changes for tax years 2018, 2019, and 2020. Okay, 2020 is over. You now have the TCJA rules that take away the immediate benefits.

Starting in tax year 2021:

  • You cannot carry back your NOL, but you can carry it forward an indefinite number of years, and
  • Your NOL can offset only up to 80 percent of your taxable income before your 20 percent Section 199A deduction.

But don’t simply give in to the TCJA rules. Consider the strategies that you can use to create taxable income and make immediate use of the loss this year, such as 

  • converting your traditional IRA to a Roth;
  • taking a taxable traditional IRA distribution if you are not subject to penalties;
  • offsetting depreciation recapture on the sale of vehicles and other equipment;
  • accelerating income into 2021; and
  • fixing depreciation errors that increase your taxable income.

Christopher Ragain

My name is Christopher Ragain, I am the founder of Tax Planner Pro.  I love helping small business owners find creative and legal ways to beat the TaxMan.  My team and I love to write and you can find all of our insights on this blog!

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