CARES Act: Updated Guidance on Changes to the Net Operating Loss Rules
Included in the recently enacted Coronavirus Aid, Relief and Economic Security Act (CARES Act) are amendments to the tax law which change the treatment of net operating losses (NOLs) generated by taxpayers in tax years beginning after December 31, 2017 and before January 1, 2021. These changes can provide a significant benefit to many taxpayers. The following is an overview of the changes:
- For tax years beginning before January 1, 2021, taxpayers are now allowed to offset their taxable income by the full amount of any aggregate NOLs that are carried back or carried forward to the tax year. This is a change from the Tax Cuts and Jobs Act (TCJA) which placed an 80% taxable income limitation on the use of certain NOL’s.
- NOLs generated on 2018, 2019, and 2020 tax returns must now be carried back to each of the 5 taxable years preceding the taxable year of the loss.
- An irrevocable election can be made to forgo the carryback period for an NOL for any tax year.
- An irrevocable election is available to exclude carrybacks to years in which the taxpayer had amounts includible in taxable income under IRC Section 965.
- NOL’s carried forward into tax years beginning after 2020 will be deductible as follows:
- An NOL generated in tax years beginning before 2018 will be fully deductible.
- An NOL generated in tax years beginning after 2017 will be subject to an 80% taxable income limitation.
- A technical correction was included that relates to fiscal year end filers 2017 returns. Under the TCJA, NOL’s generated on these returns were not allowed to be carried back. The CARES Act correction now allows NOL’s generated on fiscal year-end taxpayers 2017 returns to be carried back two years.
Since the enactment of the CARES Act, the IRS has provided additional information related to the procedural guidelines that taxpayers must follow to take advantage of and comply with the new requirements.
Revenue Procedure 2020-24 provides the following guidance related to the timing and form for making certain elections available under the CARES Act:
Election to waive the five-year carryback period for 2018 and 2019 tax years:
- For tax years 2018 and 2019, an election to waive the five-year carryback period must be filed no later than the due date (extended due date if the return is extended) for the first tax return year end that occurs after March 27, 2020. For most taxpayers, this will be the filing date of their 2020 tax return.
- The election must state that the taxpayer is electing under Rev Proc 2020-24 to apply Code Sec. 172(b)(3) along with the tax year for which it is being applied.
- The election is made by attaching to the federal income tax return a separate statement for each tax year for which the taxpayer is making the election.
- The election is irrevocable once made.
Election to exclude section 965 years from the carryback period:
- For 2018 and 2019 tax years, this election follows the same timing convention as the election to waive the five-year carryback period for those years (discussed above). For 2020 tax years, the election must be made by the due date of the federal income tax return, including extensions, for that tax year.
- The election must state that the taxpayer is electing under Rev Proc 2020-24 to apply Code Sec. 172(b)(1)(D)(v)(I) and include the tax year in which the NOL was generated along with the taxpayer’s Code Sec. 965 years.
- The election is made by attaching an election statement to whichever of the following is filed first:
- The federal income tax return for the tax year in which the NOL is generated,
- The claim for tentative carryback adjustment, Form 1139 or Form 1045, that is filed to apply an NOL to a return in the carryback period, or
- The amended federal income tax return filed to apply an NOL to the earliest tax year in the carryback period that is not a section 965 year.
- The election is irrevocable once made.
- The guidance clarifies the fact that excluded section 965 years are included for purposes of determining the five tax years in the carryback period.
- If an NOL is carried back to a year in which the taxpayer had amounts includible in taxable income under IRC Section 965, the taxpayer is treated as having made an election under IRC Section 965(n) for such year.
Revenue Procedure 2020-24 also provides procedures and deadlines related to NOL’s generated in tax years beginning before January 1, 2018 and ending after December 31, 2017.
- Taxpayers with the applicable fiscal year-end can apply for a tentative refund by filing Form 1045 for individuals or Form 1139 for corporations. These forms will be considered timely filed as long as they are filed by July 27, 2020.
- Elections to waive any carryback period, to reduce any carryback period, or to revoke any election made to waive any carryback period will be treated as timely filed if filed no later than July 27, 2020.
- These elections should be filed where the taxpayer files its Federal 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 that contains only the taxpayer’s name, address, and taxpayer identification number. The attachment must include the code section under which the election is being made, the tax year for which it applies, and the taxpayer’s basis for making the election.
In Notice 2020-26 recently issued by the IRS, the deadline for filing an application for a tentative carryback adjustment related to the carryback of an NOL that was generated in any tax year that began during 2018 and ended on or before June 30, 2019 has been extended by six months. This will allow certain taxpayers that would have otherwise missed the deadline for filing Forms 1139 and 1045 to still take advantage of the benefits of filing those forms to claim a refund related to the carryback of an NOL. The notice states that for eligible taxpayers to take advantage of the additional six months to file these forms, they must include at the top of the applicable form “Notice 2020-26, Extension of Time to File an Application for Tentative Carryback Adjustment.
The IRS has also recently released guidance requesting that all Forms 1139 and 1045 be faxed instead of a paper copy being mailed to the IRS. This will allow them to process the forms more quickly providing faster refunds to taxpayers.
Please feel free to reach out to your BRC tax advisor if you have any questions regarding the changes that have been made to the NOL rules, how they impact your business or how you can make sure your business takes full advantage of the benefits that are now available as a result of the CARES Act.