The Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, was enacted March 27, 2020, to provide wide-ranging relief to businesses and individuals adversely affected by the coronavirus pandemic. Among its many business tax relief provisions, the CARES Act amended the net operating loss (NOL) rules under Sec. 172 that were previously amended by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97.
The TCJA eliminated NOL carrybacks and permitted NOLs to be carried forward indefinitely. The CARES Act changes those rules temporarily by permitting NOLs incurred in 2018, 2019, or 2020 to be carried back for five years to the earliest year first and suspending the 80% taxable income limitation through 2020.
IRS guidance on changes
The IRS has issued guidance on how taxpayers can claim the new NOLs and how to make an irrevocable election to waive the five-year carryback.
The election to waive the NOL carryback for NOLs arising in tax years beginning in 2018 or 2019 must be made no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the first tax year ending after March 27, 2020.
A taxpayer makes the election by attaching to its federal income tax return filed for the first tax year ending after March 27, 2020, a separate statement for each of the tax 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 Sec. 172(b)(3) under Rev. Proc. 2020-24 and the tax year for which the statement applies.
The revenue procedure also explains how taxpayers that have an inclusion in income because of Sec. 965(a) in 2018, 2019, or 2020 can elect to exclude that year from the NOL carryback period. Those taxpayers may elect under Sec. 172(b)(1)(D)(v)(I) to exclude all Sec. 965 years from the carryback period for an NOL arising in a tax year beginning in 2018, 2019, or 2020. The election for an NOL arising in a tax year beginning in 2018 or 2019 must be made no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the first tax year ending after March 27, 2020. For example, a taxpayer with an NOL arising in 2019 that wishes to forgo the carryback should file the return by Oct. 15, 2021. The law does not permit a partial waiver of the carryback — the taxpayer must choose to waive the entire five-year carryback.
For an NOL arising in a tax year beginning after Dec. 31, 2019, and before Jan. 1, 2021, an election must be made by no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the tax year in which the NOL arises. The election is made by attaching a statement to the return.
The revenue procedure further provides guidance regarding elections under the special rule in Section 2303(d) of the CARES Act to waive any carryback period, to reduce any carryback period, or to revoke any election made under Sec. 172(b) to waive any carryback period for a tax year that began before Jan. 1, 2018, and ended after Dec. 31, 2017.
Taxpayers should act
To take advantage of these new tax provisions, taxpayers should file amended and original returns by Oct. 15, 2020, being aware that any election to forgo the carryback is irrevocable. These NOL changes will improve the cash flow situation for many taxpayers. One way they will improve their cash flow is by generating tax refunds.
The five-year carryback from 2018 to 2013, for example, will result in permanent tax savings by generating a refund from a period when the corporate tax rate was as high as 35% compared with the current 21% rate.
Taxpayers can carry back NOLs from 2020 to 2015, those from 2019 to 2014, and from 2018 to 2013. Any amounts carried back, for example, from 2018 to 2013 would be carried forward to 2014 and so on, if they were unused in those years.
In some cases, taxpayers may also be able to get an expedited tax refund under the tentative carryback adjustment procedures. To file a claim for an expedited refund, taxpayers should file Form 1045, Application for Tentative Refund, or Form 1139, Corporation Application for Tentative Refund.
The IRS conducts a limited examination of the application and makes the resulting credit or refund within 90 days of filing the application. The IRS has said that it is trying to process these claims as quickly as possible because it knows taxpayers need the funds. Processing of regular tax returns is also being adversely affected by the slowdown in IRS operations because of the pandemic.
The CARES Act did not provide additional time to file tentative carryback adjustment applications for NOLs arising in a tax year beginning on or after Jan. 1, 2018, and ending before March 27, 2019, even though the time to file those applications had expired when it was enacted. Therefore, the IRS granted a six-month extension of time to file Form 1045 or Form 1139 for taxpayers that have an NOL that arose in a tax year that began during calendar year 2018 and that ended on or before June 30, 2019. To take advantage of this extension, taxpayers must file the form no later than 18 months after the close of the tax year in which the NOL arose and include on the top of the form: “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”
Refunds using the expedited procedures are still available for the 2020 tax year. According to the IRS, taxpayers may also use Forms 1045 and 1139 to claim refunds due to a Sec. 965(a) inclusion from the transition tax on deferred income from controlled foreign corporations.
However, Sec. 172(b)(1)(D)(iv), added by the CARES Act, provides that a taxpayer that has a carryback to a Sec. 965 year is deemed to have made a Sec. 965(n) election that limits the amount of the loss that can be carried back to each such Sec. 965 year. Because of this, an NOL can be carried back only to reduce income in excess of the amount of the Sec. 965(a) inclusion net of the Sec. 965(c) deduction.
Because the NOL carrybacks affect taxable income in the years they are carried to, however, they may adversely affect other tax benefits in those years, so taxpayers should consider those issues in deciding what to do. Examples of benefits that may be lower because the taxpayer’s taxable income was reduced by the NOL carryback are the limits on charitable contributions and the Sec. 179 deduction.
In response to the pandemic, the IRS is accepting faxed tentative refund forms from April 17, 2020, until further notice. Forms 1045 may be faxed to 844-239-6237 and Forms 1139 to 844-239-6236.
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