How Cost Segregation Can Add Benefit to NOLs

Tax laws often change as quickly as the economy does to temper the extreme swings of the economic pendulum. That’s why when the COVID-19 pandemic turned the entire worldwide economy upside down; the CARES Act included provisions to help businesses that were hit hard recoup some of their losses at tax time. The 5-year NOL (net operating loss) carryback was temporarily reinstated. That makes this the perfect time to have a cost segregation study performed!

Why Carry Back?

Losses can be carried forward, which most people are familiar with. But they can also be carried back, which is often more beneficial because of money’s time value. The time value of money is the idea that investors prefer to receive money today over the same amount of money in the future. That’s because money can grow in value over a given period of time thanks to compounding interest and investment.

The History of NOL Carrybacks

  • The Revenue Act of 1918 first introduced the NOL carryback provision. It was meant to be a temporary benefit to companies incurring losses related to the sale of war-related items in the post-WWI era. In the beginning, the allowed carryback and carry forward were for one year. Since then, the duration of carryovers has varied, increasing and decreasing (at times, even being eliminated and then later reinstated) depending on the economy.
  • The Tax Relief Act of 1907 (TCJA) limited the NOL carryback to two years and extended the carryforward out 20 years.
  • In response to the September 11 attacks and the Great Recession of 2009, carrybacks were temporarily extended to three, four, or five years.
  • The 2017 Tax Cuts and Jobs Act removed the carryback provision (except for certain farming losses and non-life insurance companies). Along with that change, the carryforwards were allowed for an indefinite period but limited to 80% of each subsequent year’s net income.
  • The 2020 Coronavirus Aid Relief & Economic Security (CARES Act) placed a hold on the changes enacted by the TCJA until January 1, 2021, including the NOLs for farming losses and non-life insurance.

How Can Cost Segregation Maximize Your NOL Carryback?

A cost segregation study will identify and reclassify personal property assets to shorten the depreciation time for taxation purposes. This will reduce your tax obligations and increase your loss. Cost segregation can also benefit businesses in other ways. It :

  • Maximizes your tax savings by adjusting the timing of your deductions. When an asset’s life is shortened, depreciation expense is accelerated, and tax payments are decreased during the early stages of a property’s life. This frees up cash for investment opportunities or current operating needs.
  • Discover additional tax benefits. Cost segregation can reveal ways to reduce real estate tax liabilities and identify certain sales and use tax savings opportunities.
  • Reveals retroactive savings. Since 1996, taxpayers have been able to recoup immediate retroactive savings on property added since 1987. Previously, there was a four-year catch-up period for retroactive savings. Those rules have been amended to allow taxpayers to take the total adjustment in the year the cost segregation is completed. 
  • Creates an audit trail. A properly documented cost segregation study can resolve IRS inquiries in the earliest stages and protects you from any potential tax liability. 

As with all our studies, In the event of an IRS audit, or if any questions are raised, we will defend our studies at no additional cost.

Find out how much money you could save on your taxes with a no-cost, no-obligation estimate from M&E Cost Segregation.

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