Loss carryback is one of the instruments that income tax payers (individuals and corporations alike) can newly adopt to improve cash flow and bridge a period of an unexpected fall in income, not only in the current period of the world pandemic and its relating economic consequences.
The new regulation is part of the tax package which was approved as of 1 July 2020 and was implemented in tax laws to counter future economic shocks.
What does loss carryback mean? In this context, loss means net operating loss which a taxpayer reports for a tax period the last day of which is 30 June 2020 or later. The amended wording of Article 34 Paragraph 1 of Income Taxes Act enables income tax payers to deduct from their taxable income net operating loss (or its part) not only in the five following tax periods, but also in the two preceding tax periods.
Importantly, due to transitional provisions, the regulations differ for the first tax period ending on 30 June 2020 or later. If net operating loss is realized by the tax payer in this first period, the transitional provisions enable the taxpayer to utilize this net operating loss, as determined at the moment of filing. Let’s consider for simplification a tax period from 1 January 2020 until 31 December 2020. The taxpayer estimates net operating loss for this period in August 2020 already (at most CZK 30 million) and can deduct this amount from the prior year’s taxable income only (in this case year 2019). Reduction of taxable income is made through a deductible item in an amended tax return for 2019. If tax was paid in 2019 and an overpayment arises as a result of this operation, the taxpayer can request its refund. If the final net operating loss for 2020 is higher than originally estimated, the taxpayer can utilize the remaining part of this net operating loss not only in year 2019 but also in year 2018 (via another amended tax return). If, in contrast, the final net operating loss is lower than estimated (or does not arise at all), the taxpayer is required to file an amended tax return for 2019 and settle the difference, including late payment interest.
Net operating loss which is not caried back by the taxpayer (e.g. due to taxable income being too low in the preceding two tax periods) can be carried forward in the five upcoming tax periods following the year in which the net operating loss arose. New regulation in Article 34 Paragraph 1 of Income Taxes Act further stipulates that net operating loss can only be carried back up to the amount of CZK 30 million (in total for both preceding tax periods).