Prior to the Tax Cuts and Jobs Act (TCJA), in general, an NOL could be carried back two years and carried forward up to 20 years. Effective for NOLs occurring after December 31, 2017, the 2-year carryback provision is repealed (with certain exceptions for farming and casualty insurance companies). NOL carryovers are limited to 80% of taxable income for the year in which it is carried to, and may be carried forward indefinitely until used up.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Public Law 116-136) amended IRC section 172 to allow a deduction for the tax year equal to the aggregate of the NOL carryovers and carrybacks to the tax year. For an NOL occurring in any tax year beginning after December 31, 2017, and before January 1, 2021, an NOL must be carried back to each of the five tax years preceding the tax year of the NOL. The taxpayer can make an irrevocable election to relinquish the carryback period for an NOL for any tax year (and thus only carry the NOL forward).
If an NOL is carried back to any IRC section 965 year, then the taxpayer is treated as having made the election under IRC section 965(n) with respect to each such IRC section 965 year. IRC section 965 requires certain taxpayers that have untaxed foreign earnings and profits to pay a tax as if those earnings and profits had been repatriated to the United States. IRC section 965(n) allows a taxpayer to elect for a tax year to not take into account the IRC section 965 inclusion amount (adjusted by certain amounts) in determining the taxpayer’s NOL deduction for the tax year, or taxable income for the tax year that may be reduced by an NOL carryover or carryback to the tax year.
IRC section 172(b)(1)(D)(v) allows a taxpayer with one or more IRC section 965 years to elect in lieu of waiving the carryback period to exclude all IRC section 965 years from the carryback period for an NOL. IRC section 172(b)(1)(D)(v) also allows a taxpayer to exclude IRC section 965 years from or waive the carryback period for an NOL arising in a tax year beginning in 2018 or 2019 by the due date, including extensions of time, for filing the taxpayer’s federal income tax return for the first tax year ending after March 27, 2020.
A taxpayer with an NOL carryback may file an application for a tentative carryback adjustment of the tax for the prior tax year affected by the NOL carryback. The tentative carryback adjustment is designed to provide the taxpayer with a quick tentative tax refund as a result of the NOL carryback. The IRS has 90-days to make a limited examination of the application (as opposed to six-months for a refund claim on an amended return). Individuals use Form 1045, Application for Tentative Refund, and corporations use Form 1139, Corporation Application for Tentative Refund, to carryback an NOL and apply for this quick refund. If a taxpayer does not use Form 1045 or Form 1139 to carryback the NOL, the taxpayer carries back the NOL by filing an amended return for the year the NOL is carried back to.
Such application for tentative carryback adjustment must be filed on or after the date of filing for the return for the tax year of the NOL from which the carryback results and within a period of 12 months after that tax year. For any portion of a business credit carryback attributable to an NOL from a subsequent tax year, the application must be filed within a period of 12 months from the end of the subsequent tax year.
Under the CARES Act, taxpayers with NOLs arising in tax years which begin before January 1, 2018 and end after December 31, 2017 (fiscal year filers) are treated as timely filing an application for tentative carryback adjustment with respect to such NOLs if they are filed no later than 120 days after March 27, 2020. Elections to forgo or reduce the carryback of such NOLs, or elections to revoke any such prior elections, are treated as timely made if made no later than 120 days after March 27, 2020.
The CARES Act also amended IRC section 53(e) to accelerate the recovery of 100% of any remaining minimum tax credits of a corporation in its tax year beginning in 2019 (as opposed to its tax year beginning in 2021). A corporation may elect instead to recover 100% of any of its remaining minimum tax credits in its tax year beginning in 2018.
Revenue Procedure 2020-24
This revenue procedure applies to taxpayers that want to:
1) Elect to waive the carryback period for an NOL arising in a tax year beginning in 2018 or 2019,
2) Elect to exclude all IRC section 965 years from the carryback period for an NOL arising in a tax year that begins in 2018, 2019, or 2020, or
3) Make an application for tentative carryback adjustment for an NOL arising in a tax year that began before January 1, 2018, and ended after December 31, 2017.
Election to waive carryback period for NOLs arising in tax years beginning in 2018 or 2019. Such election must be made no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the first tax year ending after March 27, 2020. Attach to the federal income tax return for the first tax year ending after March 27, 2020 a separate statement for each of tax years 2018 or 2019 for which the taxpayer intends to make the election. The election statement must state that the taxpayer is electing to apply section 172(b)(3) under Revenue Procedure 2020-24 and the tax year for which the statement applies. Once made, the election is irrevocable.
Election to exclude section 965 years from carryback period. The election for an NOL arising in a tax year beginning in 2018 or 2019 must be made no later than the due date, including extensions, for filing the federal income tax return for the first tax year ending after March 27, 2020. For an NOL arising in a tax year beginning after December 31, 2019 and before January 1, 2021, the election must be made no later than the due date, including extensions, for filing the federal income tax return for the tax year in which the NOL arises.
A taxpayer must make this election by attaching an election statement to the earliest filed (after April 9, 2020) of:
1) The federal income tax return for the tax year in which the NOL arises,
2) The taxpayer’s claim for tentative carryback adjustment applying the NOL to a tax year in the carryback period, or
3) The amended federal income tax return applying the NOL to the earliest tax year in the carryback period that is not a section 965 year.
The election statement must state that the taxpayer is electing to apply section 172(b)(1) (D)(v)(I) under Revenue Procedure 2020-24, the tax year in which the NOL arose, and the taxpayer’s section 965 years. Once made, the election is irrevocable.
Even though the IRC section 965 years are excluded for purposes of carrying back an NOL, those years must still be included for purposes of counting the five tax years in the carryback period for the NOL.
If an NOL is carried back to an IRC section 965 year, the deemed election under IRC section 965(n) may not be waived for that IRC section 965 year, including if a taxpayer previously revoked an election under IRC section 965(n) for that year. The deemed IRC section 965(n) election only applies for purposes of the carryback of an NOL to such year.
See Revenue Procedure 2020-24 for information concerning consolidated groups.
Application for tentative carryback adjustment for an NOL arising in a tax year that began before January 1, 2018, and ended after December 31, 2017. Taxpayers who make an application for tentative carryback adjustment for such tax year by filing Form 1045 or Form 1139 are treated as having timely filed the application if filed no later than July 27, 2020. Similarly, elections for such tax year with an NOL to waive any carryback period, to reduce any carryback period, or to revoke any election to waive any carryback period will be treated as timely filed if filed no later than July 27, 2020.
The taxpayer may file such elections by attaching the statement required to make the election, with “Filed pursuant to Rev. Proc. 2020-24” at the top of an amended return, Form 1045, or Form 1139 containing only the taxpayer’s name, address, and taxpayer identification number. The statement required to make the election must indicate the section under which the election is being made and must include information to identify the election, the period for which it applies, and the taxpayer’s basis and entitlement to make the election.
Notice 2020-26
This notice applies to NOLs arising in tax years beginning after December 31, 2017 in which the taxpayer wants to file an application for tentative carryback adjustment. The notice extends the deadline for filing an application for a tentative carryback adjustment for an NOL that arose in any tax year that began during 2018 and that ended on or before June 30, 2019.
Under Notice 2020-26, the IRS grants a 6-month extension of time to file Form 1045 or Form 1139 to taxpayers that have an NOL that arose in a tax year that began during 2018 and that ended on or before June 30, 2019. This extension is limited to requesting a tentative refund to carry back an NOL and does not extend the time to carry back any other item.
Example: A taxpayer had an NOL for the 2018 calendar year. Under prior rules, the taxpayer would have until December 31, 2019 to file Form 1045 or Form 1139. Under Notice 2020-26, the taxpayer now has until June 30, 2020 to file Form 1045 or Form 1139 for the 2018 calendar year NOL.
To take advantage of this extension of time for requesting a tentative refund based on an NOL carryback, the taxpayer must:
1) File Form 1045 or Form 1139 no later than 18 months after the close of the tax year in which the NOL arose (June 30, 2020 for a tax year ending on December 31, 2018), and
2) Include on the top of the applicable form “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”
