New rules for NOLs under CARES Act
The CARES Act modified the rules for NOLs, replacing some of the rules made by the Tax Cuts and Jobs Act. Read more here.
The Treasury Department and IRS issued Rev. Proc. 2020-24 to address the new rules for NOLs under the CARES Act. Under the TCJA, NOLs are generally subject to an 80% of taxable income limitation and the five-year carryback period was eliminated. Under the CARES Act, taxpayers will not be subject to the 80% of taxable income limitation for NOLs arising in tax years beginning after December 31, 2017 and ending before January 1, 2021 (tax years 2018 through 2020 for calendar year taxpayers). Additionally, taxpayers will carry NOLs for this period back five years.
For more information on the CARES and FFCRA tax changes for businesses, see the Insights article, "Business assistance for COVID-19 (FFCRA & CARES Act)"
Waiving the carryback period under new rules for NOLs
Before the TCJA, taxpayers could make an election to waive the carryback period. Rev. Proc. 2020-24 provides guidance on how to make the election under the CARES Act as well as other carryback waivers for specific situations.
To waive the carryback period, taxpayers must attach a statement to their return indicating that the taxpayer is electing to apply §172(b)(3) under Rev. Proc. 2020-24. A separate statement must be made for each tax year for which the election applies, i.e. tax years 2018, 2019, and/or 2020. An election to waive the carryback period for tax years 2018 or 2019 must be made no later than the tax return due date, including extensions, for the first tax year ending after March 27, 2020. For calendar year taxpayers, that means elections for 2018 and 2019 can be made until April 15, 2021 (the due date for filing a 2020 tax return). This election is irrevocable once made.
Example: John, a calendar-year filer, filed a 2018 return that showed a $100,000 NOL carryover to 2019. His 2019 taxable income is $80,000. Before the CARES Act was passed, his 2019 NOL deduction would have been limited to $64,000 ($80,000 × 80%) and the remaining $36,000 would have been carried forward to 2020. Under the CARES Act, John’s NOL deduction for tax year 2019 is not subject to the limitation. As a result, he can claim an NOL deduction of $80,000 to offset all his 2019 taxable income and carry the remaining $20,000 forward until it is used up.
Under the CARES Act, John is required to carry back the 2018 NOL five years instead of forward. Assume it is in his best interest to carry forward the $100,000 NOL as opposed to the earliest available year within the five-year carryback period. To accomplish this, he needs to make an election waiving the carryback by attaching a statement to his 2020 return. The statement should indicate that he is electing to apply §172(b)(3) under Rev. Proc. 2020-24. He must make the election no later than the due date for filing his 2020 return, including extensions.
Other election procedures
Rev. Proc. 2020-24 also provides elections:
- For taxpayers to exclude specific years from the five-year carryback period where a §965 election is required (generally, transition tax paid in installments on certain untaxed foreign earnings).
- For fiscal year taxpayers to waive, adjust, or revoke an election for NOLs arising in tax years beginning before January 1, 2018, and ending after December 31, 2017.
Applying for a tentative refund
The Treasury Department and IRS have also issued Rev. Proc. 2020-23 and Notice 2020-26 which are meant to help taxpayers take advantage of the new rules under the CARES Act. Notice 2020-26 grants a six-month extension of time to file Form 1045 or Form 1139 with respect to the carryback of an NOL that arose in any taxable year that began during calendar year 2018 and that ended on or before June 30, 2019. Individuals, trusts, and estates file Form 1045, and corporations file Form 1139. Without the extension, taxpayers would no longer be able to use Form 1045 or Form 1139 for tax year 2018.
Starting April 17, 2020 and until further notice, the IRS will allow taxpayers to fax (rather than mail) eligible refund claims.
- Fax Form 1045 to 844-249-6237
- Fax Form 1139 to 844-249-6236
A maximum of 100 pages may be faxed. If additional documentation is necessary, taxpayers will be notified during processing. Taxpayers who happened to mail Forms 1045 or 1139 after March 27, 2020 due to CARES Act changes can also fax a copy starting on April 17.
Rev. Proc. 2020-23 also provides relief for partnerships that have not opted out of the centralized audit rules by allowing them to file an amended Form 1065 for 2018 or 2019 and issue new K-1s rather than making an administrative adjustment request (AAR). The new procedure would allow a partnership to take advantage of the new NOL rules, the new rules for qualified improvement property, etc. sooner than by using an AAR.