The preparation of tax returns for 2020 is culminating, and we can observe what a wide range of entities has been affected by the coronavirus crisis, which has caused so far profitable companies to be in the red numbers. That is why the loss carryback as a new tool of the Income Taxes Act is currently a widely discussed topic. We have prepared the most frequent questions and answers for you to help you navigate through this issue.
1. What is a loss carryback and why should we use it?
If you report a tax loss in the taxation period ending on or after 30 June 2020 (which certainly applies to the calendar year 2020 taxation period), you can use it as an item deductible from the tax base not only in the five subsequent taxation periods (i.e. until 2025) but also for the two preceding periods (i.e. for 2018 and 2019). Therefore, if you report a tax loss in the taxation period of 2020 and you paid taxes for 2018 or 2019, it is advantageous to apply the loss carryback, as part of the paid tax will be refunded to you in the form of a tax overpayment. However, the maximum limit for a loss carryback is CZK 30 million in aggregate of both preceding periods.
2. How to get the overpayment from the tax authority?
First of all, it is necessary to file an additional tax return for the selected preceding period. In this additional tax return, e.g. for 2019, you apply a tax loss from 2020, which will retrospectively reduce your tax base as well as your tax liability for 2019. The difference between the newly determined lower tax liability and the amount actually paid results in a tax overpayment for 2019, which, if refundable, will be sent to your bank account by the tax authority within 30 days of the request for refund.
3. Is it really that simple, or is there a “but”?
Yes, it really is that simple. In fact, this is the standard tax regime of an additional tax return for a lower tax liability. However, there is a certain “but“. If you apply the tax loss of 2020 retrospectively for 2019 (or 2018), you are extending the limitation period for this selected period. Until then, the standard limitation period for 2019 was 2023. By retrospective application of a loss carryback from 2020, its limitation period is extended and will end with the term for tax assessment of 2020, i.e. in 2029 at the earliest.
4. Can we somehow eliminate this long statute of limitations?
Together with the loss carryback, the Income Taxes Act introduced a new concept, i.e. waiving of the tax loss application right. However, you can only waive the tax loss application right for the period following the creation of the tax loss, i.e. for the years 2021 to 2025. If the taxpayer waives their right to claim a tax loss for the following period, the limitation period for the loss period will shorten significantly to the standard three-year length. In our case, the statute of limitations of 2020 would not be 2029 but as early as 2024. However, this decision does not shorten the limitation period only for the actual loss year 2020 but also for the preceding period in which the taxpayer applied the loss carryback of 2020 and the limitation period is thus hereby linked to 2020. For the sake of completeness, we would like to add that if the taxpayer does not apply loss carryback, the standard limitation period remains applicable for these preceding periods. In other words, limitation periods are extended for two periods preceding the occurrence of tax loss only if the tax loss is actually carried back.
5. How can we waive our right to apply a tax loss and what does it mean for us in practice?
You can waive your right to apply a tax loss in the following taxation periods via a letter sent to the tax authority, there is no official form required. However, you must keep in mind that the taxpayer must do so by the deadline for filing a regular tax return and if this deadline is not met, the right cannot be waived. It should also be taken into account that once you waive your right to apply a tax loss, your decision cannot be changed or revoked. It is also necessary to be aware of the fact that you are waiving your right in general, not a specific tax loss amount. This means that if, for example, the tax loss increases afterwards, you cannot apply the additionally increased tax loss in subsequent years.
6. So is it recommended to waive the right to apply the tax loss?
It must be said that every statutory body of a business corporation should act with due managerial care. Therefore, if a company waives a significant tax benefit in the form of an applicable tax loss, it should be considered whether such an action is defensible in this context. Waiving the right to tax loss application seems rational if all of the tax losses for the relevant period have been carried back and there is currently no amount left for the following years. Such a solution makes economic sense; this also confirms the answer to another issue – in order to shorten the statute of limitations, it is always necessary to waive the right to apply a tax loss for future years, even if all losses have been utilised in the preceding periods and there is no tax loss left to apply in the following years.
Although the loss carryback brings certain interpretation issues and the correct application and decision consequences must be carefully considered, it is a concept that is undoubtedly very positive for taxpayers. Perhaps that is why Act No. 299/2020 Coll. introducing the loss carryback was nominated for Act of the Year in our survey.