What is the difference between an amended tax return and a net operating loss carryback?
During recent years with the ever-changing tax laws and updates related to COVID we have seen a dramatic uptick in the number of clients filing amended tax returns and net operating loss (NOL) carryback claims. This post explains the difference between the two filings and the circumstances in which we use them.
Amended tax returns and NOL carrybacks are two different concepts. Here is an explanation of each:
Amended Tax Return
An amended tax return is a revised version of a previously filed tax return. It is used to correct errors or make changes to information reported incorrectly on the original return. The reasons for filing an amended tax return could include adjustments to income, deductions, credits, or other tax-related items. Typically, you would file an amended return with the IRS (Internal Revenue Service). This also includes any relevant states using specific forms for amending.
When you file an amended tax return, you are replacing the original return with the corrected version. It allows you to update your tax liability based on the revised information. It is important to note that the deadline to file an amended return is usually within three years from the original filing date. Or within two years from the date you paid the tax, whichever is later.
Net Operating Loss Carryback
A net operating loss (NOL) occurs when a taxpayer’s allowable deductions exceed their taxable income. This results in a negative taxable income. When a business or an individual experiences a net operating loss, they can often choose to carry that loss backward to offset taxable income in prior years. This is known as a net operating loss carryback.
The NOL carryback allows the taxpayer to amend their prior-year tax returns. This allows them to apply the loss to those years and potentially receive a refund for taxes paid in those earlier years. By carrying the loss back, the taxpayer can effectively recover some of the taxes paid in profitable years. The exact rules for NOL carrybacks vary depending on the tax jurisdiction and the type of taxpayer (individual or business).
For example, the Tax Cuts and Jobs Act (TCJA) made changes to NOL rules for tax years beginning after December 31, 2017. Prior to the TCJA, businesses could carry NOLs back two years and forward up to 20 years. However, under the TCJA, most NOLs arising in tax years after 2017 can only be carried forward indefinitely. The carryback option is limited to certain specific circumstances.
With the passing of the CARES Act in 2020 section 172(b)(1) was amended to provide for a carryback of any net operating loss (NOL) arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, to each of the five taxable years preceding the taxable year in which the loss arises (carryback period). This change allows for a five-year carryback.
When it comes to filing an NOL Carryback Claim, a taxpayer has a couple of items that need to be considered more quickly than with an amended return. First, if the tax return has a taxable loss, then you need to know at the time of filing your tax return. This means knowing whether you are going to carry the loss backwards or carry it forwards. If you do not make an election to carry the loss forward, then the default requirement is to carry it backwards. Second, if you are going to carry the loss backwards it must be completed within 12 months of the end of the tax year in which the loss occurred. For example, if you experienced the loss in the year ending December 31, 2020. Then you would need to file the NOL carryback claim no later than December 31, 2021.
How long does it take to get my refund when I file an amended tax return or NOL Carryback Claim? This is the real question. When this article was written, the IRS published that it was taking 20 weeks to process amended tax returns. From our experience, and speaking with employees at the IRS, it is taking much longer than 20 weeks. Recently, an IRS agent we were working with explained that the average age of the files his peers were working on was greater than 500 days.
Here is a link to the IRS website where you can check on the status of an amended tax return: https://www.irs.gov/filing/wheres-my-amended-return
Contact us If you have questions on whether you should be filing an amended tax return or NOL carryback claim. Click the Link below to get started.