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:
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 after the end of the taxable year in which the NOL arose. The IRS extended the deadline for an additional six months. For an NOL incurred by a taxpayer with a 2018 calendar year, this would extend the deadline for filing a claim to June 30, 2020.
The tentative carryback adjustment procedure allows a taxpayer to obtain a quick, tentative tax refund based on an NOL carryback. Taxpayers that are C corporations make the application on Form 1139, Corporation Application for Tentative Refund, and taxpayers other than C corporations must make the application on Form 1045, 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.
While the CARES Act goal is getting cash quickly, taxpayers should temper their expectations. Claims filed via Forms 1139 and 1045 may only be filed by paper. Presently, the IRS’ Ogden, Utah, facility is closed until at least April 20, 2020, except for “mission-critical operations.” Given the backlog of returns building up and limitations on staffing, there are legitimate concerns as to whether the IRS has the staffing to process these returns within the 90-day time frame. However, taxpayers still need to file these returns within the specified time.
Waiver of the five-year carryback rule –A taxpayer may elect to waive the carryback period for an NOL arising in a taxable year beginning in 2018 or 2019. The election must be made 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. Once made, the election is irrevocable.
Repatriation concerns – For businesses with international operations that had deemed repatriation income in prior years, the use of NOLs becomes more complex. Under the CARES Act, if an NOL is carried back to any year, then the taxpayer is treated as having made the election under section 965(n) to exclude Subpart F amounts and the repatriation tax from the computation of the NOL in each year. Rev. Proc. 2020-24 allows taxpayers to elect to exclude all section 965 years from the carryback period for an NOL arising in a taxable year beginning in 2018, 2019 or 2020. Taxpayers with repatriation income should consult with their advisors regarding their options.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.