Using Net Operating Losses to Drive R&D Tax Credit Benefits

3 Minute Read
Posted by Randy Eickhoff on Jul 2, 2020 8:22:01 AM

Each year, countless qualifying businesses fail to claim the research and development tax credit, missing out on a potentially significant return on their R&D investments. However, if you have claimed the R&D tax credit over the last few years, it's important to understand the Net Operating Loss (NOL) component of the CARES Act. At a time when so many businesses are struggling to maintain their operations and cash flow, the NOL carryback legislation can have a significant impact on previous claims.

What is the Net Operating Loss (NOL) Carryback?

The Net Operating Loss Carryback is a provision in the Coronavirus Aid, Relief and Economic Security (CARES) Act that allows businesses to carry back net operating losses (NOLs) incurred in 2018, 2019, or 2020 for up to five years. This means that businesses can claim a refund on taxes paid in any of the last five years. The NOL carryback provision is retroactive, so businesses can file amended returns for those years and receive a refund within 90 days.

This provision is significant because it allows businesses to recoup taxes paid in prior years. In many cases, the refunds can be used to offset current expenses or fund future R&D projects.

How Does the Net Operating Loss Carryback Work?

To take advantage of the NOL carryback provision, businesses must file an amended tax return in any prior year where the carryback generates a reduction in taxable income and refund claim. The amended tax return should include the amount of the NOL and updated calculation showing the reduction in taxable income and resulting refund. The IRS will then issue the refund within 90 days.

How NOL Carrybacks May Impact Your Recent Tax Credit Claims

Designed to help business owners survive the significant economic disruption of COVID-19, the Coronavirus Aid, Relief, and Economic Security (CARES) Act outlined specific legislation that allows organizations to carry back qualifying net operating losses. According to the most recent provision, business owners can carryback NOLs logged in 2018, 2019, and 2020 for up to five years to minimize or eliminate tax burden paid in previous years and claim newly available refunds for a much-needed infusion of cash.

It's important for businesses that have claimed R&D tax credits to understand the NOL carryback and its impact on previous claims. However, even if an organization hasn't previously claimed the research and development tax credit, they may still be eligible to file for the benefit while applying relevant net operating loss carrybacks. Filing an amended return with an R&D credit will increase total taxable income for the carryback year, potentially driving the total income offset by the NOL carryback.

Important R&D Credit Considerations with NOL Carryback Claims

When considering filing for or amending the R&D tax credit to include NOL carrybacks, it's important to note that the research and development provision does not result in an expenditure that lowers taxable income. Instead, it delivers a credit that offsets the income tax for a specific year. If a company is eligible for the R&D tax credit in a year  where an NOL is being carried back to, taxable income will be reduced or eliminated as a result. Any R&D tax credits taken that year would be available to be carried back (1 year) or forward (up to 20 years) to be applied against income tax  in those years. The forward application does have some exceptions for startup businesses, making it vital to discuss the process with your financial advisor.   

Additionally, utilizing an NOL carryback to lower taxable income in a previous year where the R&D tax credit was claimed may result in releasing the credit previously used in that year. As in the example above, the taxpayer may then carry back the released credit amount for one year and then bring it forward for as much as 20 years to apply against income tax.

 Is Your Business Eligible for NOL Carrybacks?

The changing R&D tax laws and legislation can make it difficult for business owners to determine if they can further increase their overall benefit for previous years. Acena Consulting can help. Contact us today to learn more about the NOL provision and how you can leverage it to reduce your overall tax burden.

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Randy Eickhoff

Randy Eickhoff

Acena Consulting President Randy Eickhoff, licensed CPA, has partnered with more than 200 companies during more than 20 years of experience securing tax credits and other government incentives. His corporate partners range from multinational technology firms to smaller, privately held manufacturing, sports, and technology enterprises.