Maximize Tax Benefits of Net Operating Losses
Valuable Assets that can Reduce Taxes
Net operating losses (NOLs) are valuable assets that can reduce taxes owed during profitable years, thus generating a positive cash flow impact for taxpayers.
Businesses should make sure they maximize the tax benefits of their NOLs.
For tax years beginning after 2020, NOL carryovers from tax years beginning after 2017 are limited to 80% of the excess of the corporation’s taxable income over the corporation’s NOL carryovers from tax years beginning before 2018 (which are not subject to this 80% limitation but may be carried forward only 20 years).
If the corporation does not have pre-2018 NOL carryovers but does have post-2017 NOLs, the corporation’s NOL deduction can only negate up to 80% of the 2022 taxable income, with the remaining subject to the 21% federal corporate income tax rate.
Corporations should monitor their taxable income and submit appropriate quarterly estimated tax payments to avoid underpayment penalties.
Corporations should monitor their equity movements to avoid a Section 382 ownership change that could limit annual NOL deductions.
Losses from pass-through entities must meet certain requirements to be deductible at the partner or S corporation owner level.
Defer Tax on Capital Gains
Tax planning for capital gains should consider not only current and future tax rates but also the potential deferral period, short and long-term cash needs, possible alternative uses of funds, and other factors.
Noncorporate shareholders are eligible for exclusion of gain on dispositions of Qualified Small Business Stock. For other sales, businesses should consider potential long-term deferral strategies, including:
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Reinvesting capital gains in Qualified Opportunity Zones.
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Reinvesting proceeds from sales of real property in other “like-kind” real property.
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Selling shares of a privately held company to an Employee Stock Ownership Plan.