IRS provides guidance on the CARES Act five-year NOL carryback

The net operating loss (NOL) carryback rules have changed over time, frequently becoming more taxpayer favorable during times of economic crises. Effective for tax years beginning Jan. 1, 2018, the Tax Cuts and Jobs Act (TCJA) changed the historic NOL carryback rules. The NOL changes were one of the primary revenue raisers in the TCJA to help offset the cost of lowering the corporate income tax rate to 21%. Under the TCJA, NOLs could no longer be carried back to offset taxable income in prior years. Additionally, NOLs generated in 2018 and subsequent years could be carried forward indefinitely.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act now allows taxpayers to carry back any NOL arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021, to each of the five taxable years preceding the taxable year in which the NOL arises. The goal of the CARES Act is to get cash quickly into the hands of taxpayers impacted by COVID-19.

In addition to the NOL adjustments, the CARES Act also modified the business interest deduction limitations, the qualified improvement property depreciable life and the noncorporate excess business loss deduction. Taxpayers that did not have an NOL in 2018 or 2019 could now have one as a result of the CARES Act changes. Be prepared to work with your tax advisor to model out how all of these could affect your 2018 and 2019 tax positions. Taxpayers with calendar years that have NOLs arising in 2018 have until June 30, 2020, to take advantage of the extended carryback filing time frame discussed below,

The changes imposed by the CARES Act created uncertainty for taxpayers in three significant ways:

1. How to get cash quickly from an NOL generated in 2018 or 2019?
2. What if the taxpayer wants to waive the five-year carryback rule of the CARES Act?
3. What to do about tax years affected by the repatriation tax under section 965?

Notice 2020-26 and Revenue Procedure 2020-24

On April 9, 2020, the IRS issued guidance that addresses these three issues:

Getting cash quickly – The IRS guidance extends the deadline for filing a tentative carryback adjustment with respect to an NOL that arose in any taxable year that began in 2018 and ended on or before June 30, 2019. The Code and the regulations require that an application be filed within 12 months