April 15, 2020 - The “Coronavirus Aid, Relief, and Economic Security (“CARES”) Act" added temporary changes to the existing rules for net operating losses (“NOL”). Revenue Procedure 2020-24 and IRS Notice 2020-26 provide guidance on the application of the new rules. (See Whitley Penn’s COVID-19 website page at
https://www.whitleypenn.com/covid-19-update/
for previous tax alerts regarding the CARES Act).
The key changes to the NOL provisions made by the CARES Act include:
- The 80% taxable income limitation for NOL carryovers with respect to the 2018, 2019, and 2020 tax years is suspended. NOLs arising in those years may now be used to fully offset taxable income in tax years to which they are carried.
- NOLs generated in tax years beginning after December 31, 2017 and before January 21, 2021 can be carried back to the five preceding taxable years. Previously, NOLs arising in tax years beginning after December 31, 2017 could only be carried forward to offset taxable income in future tax years and could not be carried back to previous tax years. The carryback is mandatory unless the taxpayer elects to waive that treatment and carry forward the NOL to future tax years.
- The excess business loss rule that limits the amount of losses from pass-through entities claimed by individual or fiduciary taxpayers is no longer applicable to tax years beginning before 2021. If the resulting increased loss utilization in 2018 or 2019 creates an NOL, that loss is eligible to be carried back under the previously described rules.
Generally, it is advantageous to carry back an NOL from the eligible years specified in the CARES Act since the statutory tax rates in the five-year carryback period were higher than the current rates. However, the decision whether or not to waive the NOL carryback should be made after careful consideration of a taxpayer’s overall financial and income tax position over the entire time period in which the losses may be utilized.
In accordance with Revenue Procedure 2020-24, a taxpayer that elects to waive the 5-year carryback for NOLs arising in 2018 and 2019 may do so by attaching a statement to its Federal income tax return for its first tax year that ends after March 27, 2020. Individuals and calendar year corporations are required to attach the statement to their 2020 Federal income tax return.
The election should state that the taxpayer is waiving the carryback period under Revenue Procedure 2020-24 and specify the tax year to which the election applies. Taxpayers waiving the carryback period for both 2018 and 2019 are required to attach a separate statement for each year. The election is irrevocable.
Taxpayers that do not elect to forgo the NOL carryback can file a refund claim by carrying back a loss generated in a tax year beginning after December 31, 2017 and ending before January 21, 2021 to the five preceding tax years. The NOL carryback is claimed by filing an amended return for the year to which the loss is carried back or a tentative carryback claim for the loss year.
Individuals and corporations file applications for tentative carryback claims on Forms 1045 and 1139, respectively. A tentative carryback claim filed on these forms is subject to more limited examination procedures and the IRS will generally issue a refund within 90 days of the filing of the application.
Notice 2020-26 extends the deadline for filing the tentative carryback claim on Forms 1045 and 1139 from 12 months to 18 months after the close of the loss year. This six-month extension allows calendar year taxpayers until June 30, 2020 to file a claim for 2018 that normally would have been due no later than December 31, 2019.
The IRS announced that beginning April 17, 2020 taxpayers may temporarily file Forms 1045 and 1139 by fax while its service centers are closed and not processing paper filings. Previously, these forms could only be paper filed. The fax filing procedures apply only to Forms 1045 and 1139 and not to any other refund claims.
Due to the time sensitive nature of these provisions, your Whitley Penn Tax Advisor will coordinate with you to determine the best plan to maximize the overall tax benefit available to you from these law changes by amending tax returns (if necessary), utilizing available losses, and timely filing any refund claims.
