Nastassia Koyfman, J.D., LL.M.
4.28.20 | Client Alert – COVID-19
Prior to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Tax Cuts and Jobs Act (TCJA) eliminated Net Operating Loss (NOL) carrybacks for tax years beginning after 2017. Instead, under the TCJA, there was an indefinite carryforward of those NOLs, and only farming NOLs could be carried back for 2 years. TCJA also imposed a limit on NOL carry forward utilization of 80% of taxable income.
The CARES Act temporarily allows taxpayers to carryback losses (5-year carryback period) that were generated in years beginning after December 31, 2017 and before January 1, 2021 (2018-2020). The CARES Act also eliminates the 80% limitation of NOL utilization in the carryback (2013-2018) or the carryforward year (2019-2020) and allows NOLs generated for tax years 2018-2020 (prior to January 1, 2021) to fully offset taxable income. Taxpayers can waive the 5-year carryback of NOLs, in favor of carrying them forward, with respect to each loss year on a timely filed return (including extensions). This election to waive the carryback is irrevocable.
The carryforward period for NOLs generated in years beginning after December 31, 2017 remains unlimited. In addition, for NOLs arising in tax years beginning before January 1, 2018 the 20-year carryforward period remains unchanged.
The IRS recently issued Rev. Proc. 2020-24 to grant taxpayers an extension of time to waive the five-year carryback for 2018 and 2019 NOLs. Under the CARES Act, the time for making the waiver election for tax years beginning in 2018 and 2019 is extended to the due date (including extensions) for filing the taxpayer’s return for first tax year ending after March 27, 2020 (2020 Tax Return). The chart below provides a procedure for electing out of the new NOL carryback rules.
Taxpayers can amend tax returns or file applications for a tentative carryback adjustment with Form 1139 Corporation Application for Tentative Refund and Form 1045 (Application for tentative refund for all other taxpayers) to take advantage of carryback of NOLs and to receive expedited refunds. To better understand the advantages and disadvantages, and for a comparison between the application for tentative refund and the filing of amended tax returns, click here.
These carry back claim refunds are intended to allow individuals and corporations to reinvest cash back into the economy. In particular, taxpayers can use the NOL carrybacks to offset income taxed at higher rates, as corporate income was previously taxed at 35% and the individual marginal tax rate was previously 39.6%, as compared with 21% and 37% currently.
However, alternative minimum tax (AMT) may apply to taxpayers filing amended returns or tentative carryback adjustments for carryback years. The application for a tentative refund is generally due within 12 months of the close of the taxable year in which NOL arose. Tax year 2018 NOLs normally could not be carried back using the short-form application for tentative refund because the due date of the form was December 31, 2019. However, in Notice 2020-26 the IRS granted a six-month extension to June 30, 2020 to file a 2018 tentative carryback adjustment under Internal Revenue Code (IRC) Section 6411.
See chart below for rules that apply to NOLs generated in different years to different carry-back and carry-forward years, carryback and carryover periods, % of taxable income limitation, forms to use to carryback NOL and guidance on how to waive NOL carry-back.
|Tax Years of NOL Generation||Carry-back||Carry-Forward||Usage of Taxable Income (TI) %||Forms Used to Carry-back||How to Waive NOL Carry-back|
|Beginning on or before Dec 31, 2017|
|2 years||20 Years||100% of TI||Amended Tax Return (ATR).|
Amended tax return can be filed any time within 3 years of filing date of return reporting NOL (with extensions).
|On timely filed (including extensions) tax return (TR).|
|Beginning After Dec 31, 2017 and before Jan 1, 2021|
|5 years||Unlimited||100% of TI|
80% of TI for post 1/1/18 NOLs carried to post 12/31/20 years.
|Application for Tentative Refund (Form 1139 or 1045) or Amended Tax Return.|
2018 Application is due June 30, 2020.
Include on top of 2018 application: “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment”.
2019 Calendar-year Application is due Dec 31, 2020.
|For 2018-2019 TRs, file irrevocable election to waive carry-back on 1st tax return for tax year ending after March 27, 2020 (2020 TR).
Attach 2 separate statements for each year stating: “Taxpayer is electing to apply Sec. 172(b)(3) under Rev. Proc. 2020-24 and tax year for which statement applies”.
For 2020 TR make an election on timely filed TR.
|Beginning on or after |
Jan 1, 2021
(2021 and forward)
|N/A||Unlimited||80% of TI||N/A||N/A|
The CARES Act also makes technical corrections to post-TCJA NOLs in effect in tax year 2021 relating to the interaction of the NOL deductions with the qualified business income deduction (pursuant to IRC Section 199A). In particular, the Act clarified that post-TCJA NOLs are computed based on taxable income before the IRC Section 199A business income deduction. Furthermore, the Act clarified that pre-2017 NOLs that are carried forward to years beginning on or after January 1, 2021 will not be subject to 80% of taxable income limitation on NOL usage.
Additionally, the CARES Act provides guidance on the determination of NOL limitations in years beginning after December 31, 2020, where a taxpayer has both pre-and-post TCJA carryover losses. In such as case, the deduction is equal to the pre-TCJA NOL plus 80% of the taxable income remaining, if any.
For more information on this topic or any other matter related to the COVID-19 pandemic, please contact your Berdon advisor and visit Berdon’s COVID-19 Information Center.
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