Return of the TCJA NOL Rules: The 2021 Nightmare!

The Tax Cuts and Jobs Act (TCJA) ugly net operating loss(NOL) rules, which were laid dormant by the CARES Act, reappear in tax year 2021 to limit your tax loss benefits.

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

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 Joe’s $40,000 NOL arose during tax year 2021, he is subject to the TCJA rules and his 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.

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.

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.

If you are looking at a business loss this year and would like to see if you can take advantage of it now, please call me on my direct line at509-543-7600 or send a request HERE.

August 2021

This blog does not provide legal, financial, accounting, or tax advice. This blog provides practical information on the subject matter. The content on this blog is “as is” and carries no warranties. TaxMedics does not warrant or guarantee the accuracy, reliability, and completeness of the content on this blog. Please contact us directly to discuss how this information may be used based on your actual facts and circumstances.