The recent CARES Act for Covid-19 relief brought with it a lot of changes to the tax code which may benefit freelancers. One of the key changes which may have gone under the radar to date is the loosening of restrictions on the net operating loss (NOL) deduction, which were put in place under the Tax Cuts and Jobs Act. If your freelance revenue was lower this year and you sustained losses, you may now be able to use this NOL change to lower your tax bill—or even get a refund.
Let’s start with what an NOL is and how it could impact your freelance taxes, especially if you did not have a good year in 2020 due to the pandemic. In simple terms, an NOL is a situation where your business deductions exceed your business income. This results in a significant differential that it offsets other taxable sources of income. On your tax return you will be reporting negative taxable income on your current year tax return.
The recent Covid relief bill may impact how you handle your NOL situation because the CARES Act temporarily reinstates a carryback period for all NOLs generated in years beginning after Dec. 31, 2017, and before Jan. 1, 2021 (i.e., it applies for tax years 2018, 2019, and 2020). The carryback period for these tax years is five years under the CARES Act , so if you had an NOL in the 2020 tax year, you can carry it back to the 2015 tax year if you had taxable income then and potentially realize a tax refund. You can also carry a NOL forward so you do not have to have the hassle of amending tax returns, however, if you are looking to reduce your taxes now, this won’t be an effective strategy.
This amendment to the NOL rule applies to 2018 and onward so you may want to look at the last two years of returns to see if you can take advantage of it.
If you had a loss in 2018 and 2019 and you do not want to carry back the losses, you’ll need to make sure you identify this on your 2020 tax return and waive the carryback.
The IRS is granting a six-month extension of time to file Form 1045 or Form 1139, as applicable, with respect to the carryback of a net operating loss that arose in any taxable year that began during calendar year 2018 and that ended on or before June 30, 2019. Individuals file Form 1045 and corporations file Form 1139 .
The CARES Act NOL guidance also includes provisions to disregard certain amounts of foreign income subject to transition tax that would normally be included as income during the five-year carryback period and the temporary suspension of the TCJA’s 80% limitation on taxable income applied to all NOLs incurred in tax years beginning after December 31, 2017. The CARES Act suspends this 80% taxable income limitation, so you can carry forward 100% of your NOL to fully offset taxable income in tax years beginning before January 1, 2021.
The CARES Act is providing taxpayers with a short window of opportunity to temporarily use the NOL deduction to their advantage. Freelancers with NOLs for tax years 2018, 2019, and/or 2020 could be able to reduce their taxable income and create or increase their opportunity for a tax refund this year with these changes, which could be one small positive from the overall negative effect of Covid-19 on many businesses.
Jonathan MEDOWS is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He provides tax, accounting and business articles for freelancers on his website, http://www.cpaforfreelancers.com, which also features a blog and a comprehensive freelance tax guide. Please note, due to the high volume of inquiries in regard to COVID-19, Jonathan is not able to respond to individual requests for information at this time.