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

3 Minute Read
Posted by Brad Mols 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.


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 carry back NOLs logged in 2018, 2019, and 2020 for up to five years to minimize tax burden owed in previous years and claim newly available refunds for a much-needed infusion of cash.

It's important for businesses that have claimed recent 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 will increase total taxable income for the designating year, potentially driving the total income offset by the NOL carryback.


Important Considerations with the Net Operating Loss Carryback

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 lowers the income tax for a specific year. If a company is eligible for the R&D tax credit in a year that doesn't demonstrate taxable income, it can carry back the credit one year and forward it up to 20 years to ensure it's applied against taxes due during a year that does generate income. It's important to note that 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. 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 owed 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.


Brad Mols

Brad Mols

Acena Consulting Partner. Brad is a licensed CPA that has guided a broad range of clients in the manufacturing, technology, architecture, and engineering industries through specialized tax credits and incentives engagements.