May 09, 2020 CARES Act Provides Unique Opportunities for the R&D Tax Credit
Net Operating Loss (NOL) rules frequently change and are oftentimes unfavorable to taxpayers. Prior to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Tax Cuts and Jobs Act (TCJA) would not allow NOLs to be carried back and only 80% of NOL carryforwards could offset taxable income effective for tax years commencing January 1, 2018.
The CARES Act offers the following changes to Federal NOLs:
1. NOLs arising in a tax year starting post December, 31 2017, but prior to January 1, 2021, can be carried back to each of the five taxable years preceding the taxable year in which the NOL arises.
2. Taxpayers with NOLs that occurred in 2018 must make the election by June 30, 2020.
3. The five year carryback rule may be waived for tax years beginning in 2018 and 2019. It must be made on the first taxable year ending after March 27, 2020. The election is irrevocable.
4. The 80% restriction on NOL carryforwards is deferred until the end of 2020.
What does this mean for the R&D tax credit?
Simply put, while the R&D tax credit will not provide additional tax savings if the NOL carryback reduces taxable income to zero. It will, however, provide valuable tax credits to be used in future years. Additionally, the NOLs may provide an opportunity to obtain R&D tax credits that were otherwise unavailable to the taxpayer due to a closed tax year.
How can a company take advantage of the R&D tax credit in a closed tax year?
In the example below, the taxpayer will carry back the 2019 NOL through 2013. This zeroes out the income in tax years 2013 through 2018. While tax years 2013 through 2016 are closed tax years, the NOL carryback allows the taxpayer to now generate an R&D credit for each tax year. The closed tax years are effectively “opened” since there is no longer a tax liability. Thus, if the taxpayer amends for the R&D tax credit, the R&D tax credit has to be carried forward to a tax year with a tax liability, and the taxpayer will not be asking for a refund. Thus, the R&D tax credit will carry forward to at least 2020. Should the taxpayer be projecting a large tax liability, the R&D credits will allow the taxpayer to immediately be able to reduce estimated tax payments.
In the example above, this would potentially give the taxpayer $295,000 in R&D tax credits to apply to future years providing them with an immediate increase to cash flow.
While the CARES Act will provide cash relief to some taxpayers through the NOL carryback, it could also provide future cash flow and tax relief by allowing a company to generate the R&D tax credit in an otherwise closed tax year.
About the Author: Lacey Robb is the R&D Tax Credit Practice Leader for ICS Tax, LLC. She is an attorney and has an LLM in Taxation and has helped numerous taxpayers in a variety of industries take the R&D tax credit. She can be reached by phone at 310-968-0970 or by email at firstname.lastname@example.org.
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ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices located throughout the country.