Anchin’s Post-Election Insights: To Carryforward or Carryback Losses…That Is the Question

The CARES Act allows a five-year carryback of any tax losses generated in a taxable year beginning after December 31, 2017 and before January 1, 2021. Alternatively, a taxpayer can make an election to waive these tax loss carrybacks on their 2020 return and instead carry the tax losses forward to future years. With a Biden Administration approaching, an increase in tax rates is possible. Changes may include raising taxes on corporations to 28% (from 21%), increasing the top personal income tax rate back to 39.6% (from 37%) and eliminating the 20% qualified business income deduction for those making $400,000 or higher.

Currently, this deduction, when combined with the 37% tax bracket rate, can give individuals owning partnerships, S Corporations or sole proprietorships, a top tax rate of 29.6%. Taking these tax proposals into consideration makes the decision to carry forward or carry back losses complicated.

Companies and individuals should not base their decision solely on election results since proposals made on the campaign trail do not necessarily result in new laws. Taxpayers need to look at their current financial situation and their income projections over the next few years to see what would serve them best. If they have been able to weather the storm and have access to capital and debt financing, they may determine maximizing their losses in 2020 and carrying them forward would be more prudent. However, if they are concerned about liquidity and had and were subject to maximum tax brackets in prior years getting those refunds may be their best bet.

Once a taxpayer decides whether to carry back or carry forward tax losses, they will then need to consider if they want to maximize the tax loss and accelerate any possible deductions into the current year to become part of the carryback or carryover, or take them in future periods. For example, companies which are on the cash basis for tax purposes should be determining if they should pay their expenses in advance while deferring income into next year. Another area to analyze is maximizing depreciation (section 179 and bonus depreciation versus opting out of accelerated depreciation).

Like so many areas, advance planning will be key to optimizing the value of these tax benefits. If you or your company may be in a loss position, please reach out to your Anchin Relationship Partner to assist you in planning to maximize the value of these tax losses.