CARES Act Provides New NOL Options
In an effort to provide relief to businesses struggling because of the COVID-19 crisis, the CARES Act unraveled several of the provisions enacted by the Tax Cuts and Jobs Act to generate revenue. Several of these key changes were to net operating loss provisions, opening the door for some taxpayers to recover fairly immediate refunds if they act quickly.
Tax Cuts and Jobs Act Background
The Tax Cuts and Jobs Act eliminated carrybacks for net operating losses arising in businesses other than farming businesses and casualty insurance companies for tax years ending after December 31, 2017. Instead, losses were carried forward indefinitely. Farm businesses were given a two-year carryback, instead of their traditional five-year carryback. The Tax Cuts & Jobs Act also limited the NOL deduction to 80% of taxable income for tax years beginning after December 31, 2017.
CARES Act Changes
Section § 2303(b) of the CARES Act modified IRC § 172(b)(1) by adding a new subsection (D) requiring net operating losses arising in tax years beginning in 2018, 2019, and 2020 to be carried back five years. The new five-year rule applies to all businesses, including farming businesses and casualty insurance companies. Farmers no longer have a two-year carryback option for these years. Taxpayers may, however, elect out of the carryback altogether and carry the loss from these years forward indefinitely.
No Taxable Income Limitation
Section 2303 of the CARES Act also modified section 172(a) to provide that, for taxable years beginning before January 1, 2021, a net operating loss carryover and/or carryback may offset 100 percent of taxable income.
As noted above, the Tax Cuts and Jobs Act provided that the changes to net operating loss carryforwards and carrybacks were effective for “taxable years ending after December 31, 2017.” The committee report, however, stated that the effective date for the changes would be tax years “beginning after December 31, 2017.” As written, fiscal year taxpayers with years ending in 2018 were subject to the new restrictions for their 2017 fiscal year, even if the majority of their tax year was in 2017. Section 2303(c) of the CARES Act corrects this error by providing that the modified carryover and carryback provisions apply to net operating losses arising in taxable years beginning after December 31, 2017. Impacted taxpayers have 120 days from the date of enactment March 27, 2020 to adjust their elections accordingly.
Addressing the Changes
While helpful in many cases, the NOL changes mean that impacted taxpayers must take action to conform to the new law and take advantage of the relief provided. To carry back NOLs to prior tax years, taxpayers may typically file an application for a tentative refund, Form 1139, for corporations and Form 1045 for individuals, estates, and trusts. This expedited process allows filers to generally receive a refund within 90 days. This procedure, however, is generally only available up to one year after the end of the tax year when the NOL was created. This deadline for 2018 was December 31, 2019. If that deadline has passed, taxpayers can file amended returns for the carryback year up to three years after the due date of the taxable year in which the NOL arose. It can take months, however, to receive refunds from this process.
IRS Notice 2020-26
IRS addressed this problem with IRS Notice 2020-26, issued April 9, 2020. This procedure provides taxpayers an additional six months to file Form 1045 or Form 1139 for tax years beginning in 2018 and ending before June 30, 2019. This gives calendar year filers until June 30, 2020, to file a carryback claim using the expedited procedures. This extension of time is limited to requesting a tentative refund to carry back an NOL and does not extend the time to carry back any other item.[i]
To take advantage of Notice 2020-26, the taxpayer must do two things:
- File the Form 1045 or 1139 no later than 18 months after the close of the year in which the NOL arose (i.e., June 30, 2020 for a 2018 tax year), and
- Include on the top of the Form 1045 or 1139 “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.
On April 14, 2020, IRS issued temporary faxing procedures for expediting the processing of these forms. Starting on April 17, 2020 and until further notice, the IRS will accept eligible refund claims Form 1139 submitted via Fax to 844-249-6236 and eligible refund claims Form 1045 submitted via fax to 844-249-6237.
Rev. Proc. 2020-24
Waive the Carryback
Revenue Procedure 2020-24, also issued April 9, sets forth procedures to allow taxpayers to elect under § 172(b)(3) to waive the carryback period for an NOL arising in a taxable year beginning after December 31, 2017, and before January 1, 2020. It also allows fiscal year taxpayers impacted by the technical correction to take advantage of that relief.[ii]
The guidance states that taxpayers may elect to waive the carryback period for an NOL arising in a taxable year beginning in 2018 or 2019 no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the first taxable year ending after March 27, 2020.
A taxpayer makes this election by attaching to its federal income tax return filed for the first taxable year ending after March 27, 2020, a separate statement for each of taxable years 2018 or 2019 for which the taxpayer intends to make the election. The election statement must state that the taxpayer is electing to apply § 172(b)(3) under Rev. Proc. 2020-24 and the taxable year for which the statement applies. Once made, the election is irrevocable.IRS stated in an April 23 Q & A that farmers may not revoke a prior election to revoke the two-year carryback to carry the NOL back five years:
Q7. Prior to the CARES Act, only certain farming businesses and insurance companies could carry back NOLs arising in taxable years beginning in 2018 and 2019. If I am in one of these categories and I previously filed elections to forgo the carryback period for NOLs arising in tax years 2018 and 2019, am I eligible to revoke those elections and claim the five-year carryback period with respect to such NOLs?
A7. No. The CARES Act does not provide for an election to revoke prior elections to forgo the carryback period for NOLs arising in these years. You may, however, make an election to revoke a prior election to relinquish the carryback period with respect to an NOL arising in a 2017 fiscal tax year. See section 4.04(1) of Revenue Procedure 2020-24 and Q&A6 for additional information regarding when and how to file that election.
Take Advantage of Technical Correction
The revenue procedure also provides that taxpayers with an NOL arising in a taxable year that began before January 1, 2018, and ended after December 31, 2017, who make an application on either Form 1045 or Form 1139 with respect to a carryback of such NOL will be treated as having timely filed if the application is filed no later than July 27, 2020. Similarly, elections for such taxable years with an NOL to waive any carryback period, to reduce any carryback period, or to revoke any election made under §172(b) to waive any carryback period will be treated as timely filed if filed no later than July 27, 2020.
A taxpayer may file such elections where the taxpayer files its Federal income tax return by attaching the statement required to make the election, with “Filed pursuant to Rev. Proc. 2020-24” at the top, to an amended return, Form 1045, or Form 1139 containing only the taxpayer’s name, address, and taxpayer identification number. The statement required to make the election must indicate the section under which the election is being made and shall set forth information to identify the election, the period for which it applies, and the taxpayer’s basis and entitlement to make the election.
[i] If the taxpayer is a corporation, the deadline to claim a minimum tax credit described in §53(e)(5) is December 30, 2020, but in order to file one application for a tentative refund and claim both the NOL carryback and the minimum tax credit at the same time, the taxpayer must do so by the earlier of the two deadlines.
[ii] The revenue procedure also contains instructions for excluding from the carryback period any taxable year in which the taxpayer has an IRC § 965(a) inclusion. This overview does not address transition tax issues.
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