IRS Provides Guidance for Farming Loss NOLs
On June 30, 2021, IRS issued Rev. Proc. 2021-14, which details special elections and revocations available to taxpayers with farming loss net operating losses (NOLs) in 2018, 2019, and 2020. The guidance was necessary to instruct taxpayers on how to comply with a special legislative fix for farming loss NOLs implemented by the Consolidated Appropriations Act, 2021 (CAA), enacted December 27, 2020.
The Tax Cuts and Jobs Act generally eliminated carrybacks for NOLs arising in taxable years beginning after December 31, 2017. Any portion of an NOL that is a farming loss, however, was entitled a two-year carryback. Farm businesses could make an irrevocable election to waive this carryback. The TCJA also restricted NOL deductions to 80 percent of taxable income, computed without regard to the NOL deduction.[i]
Section § 2303(b) of the CARES Act amended IRC § 172(b)(1) to provide that NOLs arising in tax years beginning in 2018, 2019, and 2020 are to be carried back five years. The new five-year rule applied to all NOLs, including farm NOLs. Section 2303(a) of the CARES Act also modified IRC § 172(a) to provide that, for taxable years beginning before January 1, 2021, an NOL carryover and/or carryback may offset 100 percent of taxable income. The 80 percent taxable income limitation again applies for tax years beginning after December 31, 2020. Under § 172(b)(3), which predates the TCJA or the CARES Act, any taxpayer entitled to an NOL carryback period under § 172(b)(1) may irrevocably elect to relinquish the entire carryback period with respect to that NOL for any taxable year.
After the CARES Act changes, farmers no longer had a two-year carryback option for the 2018, 2019, and 2020 tax years. They now had a five-year carryback or could elect to waive the carryback altogether. But when the CARES Act removed the two-year carryback for those tax years, the new law did not provide farmers with an option to revoke their previous elections. In other words, if a farmer did not carry an NOL back two years in 2018 and 2019, the CARES Act provided the farmer with no option to take advantage of the CARES Act five-year carryback. If a farmer did carryback an NOL two years in 2018 or 2019, the CARES Act allowed that farmer to carryback that NOL five years, but it remained unclear what would happen if a farmer failed to take action to carry the two-year NOL back five years.
Section 281 of the CAA’s COVID-Related Tax Relief Act of 2020 sought to correct these issues by allowing a farmer to elect, for tax years 2018, 2019, or 2020, to disregard the CARES Act changes. It also allows farmers to revoke a prior election to waive a carryback for the 2018 and 2019 tax years. Section 281 amended the CARES Act by adding new section 2303(e), specifically addressing “farming loss” NOLs. The June 30, 2021, guidance details the procedures for making these elections and revocations.
Affirmative Election to Disregard CARES Act Changes (Apply a Two-Year Carryback)
An election under § 2303(e)(1), means that a farmer will disregard the CARES Act changes and continue to carry the farming loss back two years, subject to the 80 percent taxable income limit for tax years 2018, 2019, and 2020. If the taxpayer also has a non-farm loss, the election to disregard the CARES Act changes prevents the carryback of non-farm losses to any taxable year beginning before January 1, 2018.
The affirmative election to disregard the CARES Act changes is generally made by the due date, including extensions, for filing the taxpayer’s return for the first taxable year ending after December 27, 2020. Once made, this election is irrevocable.
To make this election, the taxpayer must attach a statement to the federal income tax return for the taxpayer’s first taxable year ending after December 27, 2020. The statement must provide in type or legible writing at the top of the statement the following:
“The taxpayer elects under § 2303(e)(1) of the CARES Act and Revenue Procedure 2021-14 to disregard the amendments made by § 2303(a) of the CARES Act for taxable years beginning in 2018, 2019, and 2020, and the amendments made by § 2303(b) of the CARES Act that would otherwise apply to any net operating loss arising in any taxable year beginning in 2018, 2019, or 2020. The taxpayer incurred a Farming Loss NOL, as defined in section 1.01 of Revenue Procedure 2021-14, in [list each applicable taxable year beginning in 2018, 2019, or 2020].”
The taxpayer should also attach a copy of the statement to any original or amended federal income tax return or application for tentative refund on which the taxpayer claims a deduction attributable to a two-year NOL carryback pursuant to the affirmative election.
Any taxpayer with a farming loss NOL that filed a federal income tax return before December 27, 2020, that disregarded the CARES Act Amendments, is treated as having made a deemed election under IRC § 2303(e)(1), unless the taxpayer amends such return to reflect such amendments by the due date (including extensions of time) for filing the taxpayer’s Federal income tax return for the first taxable year ending after December 27, 2020.
Revoking a Prior Election to Waive the Two-year Carryback Period
The COVID-Related Tax Relief Act also allows farmers to revoke a prior election to waive a carryback for the 2018 and 2019 tax years. In other words, farmers who had previously elected to waive the two-year carryback (before December 27, 2020), may now revoke that election and carry the NOL back five years for tax years 2018 and 2019.
A taxpayer must make this revocation by the date that is three years after the due date, including extensions of time, for filing the return for the taxable year the farming loss NOL was incurred.
Rev. Proc. 2021-14 provides that to revoke this prior election, the taxpayer must attach a statement to an amended return for the loss year. The statement must provide in type or legible writing at the top of the statement the following:
“Pursuant to section 4.01 of Rev. Proc. 2021-14 the taxpayer is revoking a prior §172(b)(1)(B)(iv) or § 172(b)(3) election not to have the two-year carryback period provided by § 172(b)(1)(B)(i) apply to the Farming Loss NOL, as defined in section 1.01 of Rev. Proc. 2021-14, incurred in the taxable year.”
[i] The 80 percent limitation does not apply to non-life insurance companies.
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