COVID-19 Relief for Taxpayers Claiming NOLs

TCJA made drastic changes to net operating losses (NOLs) by eliminating carrybacks, allowing only carryforwards, and limiting carryforwards to 80% of taxable income in the carryforward year. Then along came the coronavirus and Congress changed its mind in order to provide cash to virus-strapped businesses.

The CARES Act amended §172(b)(1) to provide for a carryback of any net operating loss (NOL) arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021, to each of the five taxable years preceding the taxable year in which the loss arises. In other words, NOL carryback rules for tax years 2018, 2019 and 2020 are eased.

Revenue Procedure 2020-24 provides guidance to taxpayers with net operating losses that are carried back under the CARES Act by providing procedures for:

Electing to waive the carryback period. A taxpayer may elect under §172(b)(3) to waive the carryback period for an NOL arising in a taxable year beginning in 2018 or 2019. The election must be made no later than the due date, including extensions, for filing the taxpayer’s Federal income tax return for the first taxable year ending after March 27, 2020. The election is made by attaching to the income tax return a separate statement for each of the taxable 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 §172(b)(3) under Rev. Proc. 2020-24 and the taxable year for which the statement applies.

Tax practitioner note. For a calendar year individual, the election must be made by April 15, 2021, plus extensions.

Tax practitioner planning. The Rev. Proc. provides procedures for waiving a carryback period, reducing a carryback period, or revoking an election to waive a carryback period for a fiscal year taxpayer whose taxable year began before Jan. 1, 2018, and ended after Dec. 31, 2017.

Notice 2020-26 Grants an Extension of Time to File Application for Tentative Carryback Adjustment

The CARES Act did not provide additional time to file tentative carryback adjustment applications with respect to NOLs arising in a taxable year beginning on or after Jan. 1, 2018, and ending before March 27, 2019, even though the time to file those applications had expired as of the date of enactment. Taxpayers whose losses in these taxable years may now be carried back to an earlier taxable year would generally be able to file amended returns to claim refunds or credits resulting from the change in the law. These taxpayers, however, would not be able to take advantage of the expedited tentative carryback adjustment procedure without an extension of time to file Form 1139 or Form 1045.

To address this problem, IRS has granted a six-month extension of time to file Form 1045 or Form 1139, as applicable, to taxpayers that have an NOL that arose in a taxable year that began during calendar year 2018 and that ended on or before June 30, 2019.

To take advantage of the extension of time for requesting a tentative refund based on an NOL carryback, the taxpayer must perform the following actions:

• File the applicable form no later than 18 months after the close of the taxable year in which the NOL arose (that is, no later than June 30, 2020, for a taxable year ending December 31, 2018)
• Include on the top of the applicable form “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”

NOLs and the Statute of Limitations

CARES allows a 5-year carryback of NOLs created in 2018, 2019 and 2020. That means an NOL from 2018 is carried back to 2013. “But, wait the 2013 tax year is closed by the statute of limitations, isn’t it?” NO, as long as the loss year is open, the carryback is allowed (§6501(h)).

Webcast on the Coronavirus Tax Update

This is an update to an earlier webcast. This version, and any subsequent versions, are available free to registrants. CPE credit can only be earned once.

A 2 hour webcast titled The Coronavirus Tax Update is available to watch now!The webcast includes:

• The filing tax delay – news and update
• The stimulus rebate payments – news from the IRS and an update on client questions
• Other individual changes- charity, medical and student loans
• Coronavirus “disaster” loss reimbursements- §139
• Retirement plan changes
• Paycheck Protection Program loans
• Sick leave and Family leave details
• Employer Retention Payroll Tax Credit rules
• Employer payroll Tax Delay procedures
• Other business changes – NOLs,461(l), §163(j)- and more
• Two client letters are included to help you communicate with your clients