The IRS has released guidance (Rev. Proc. 2020-24
and Notice 2020-26
) providing taxpayers with expedited procedures for claiming refunds for five-year net operating loss (NOL) carrybacks under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The guidance includes procedures for electing to waive the carryback period in its entirety or exclude a year (in otherwise the extended carryback period) in which the taxpayer had a Section 965 inclusion (a Section 965 year), and expands the ability for taxpayers to file expedited refund claims using the Form 1139, “Corporation Application for Tentative Refund” and Form 1045, “Application for Tentative Refund.” The IRS is also temporarily allowing five-year NOL carryback claims on Forms 1139 and 1045 to be faxed. The five-year carryback provision is one of the most favorable provisions in the CARES Act, and these filing procedures should provide many taxpayers access to prompt refunds.
The opportunity is especially powerful because losses can be carried back and used against the higher tax rates in effect before the Tax Cuts and Jobs Act (TCJA), enacted in 2017. There may be opportunities to enhance the benefit with accounting method changes and other timing strategies to increase NOLs. Modeling will be important as deductions will be more valuable when used in a loss year, and there are many technical considerations that can restrict or affect NOLs.
New carryback rules
The TCJA originally eliminated NOL carrybacks for tax years ending after 2017. The CARES Act changes those rules to provide that NOLs arising in tax years beginning after Dec. 31, 2017, and before Jan. 1, 2021, are carried back five years. NOLs arising in a tax year beginning in 2017 and ending in 2018 can be carried back two years, fixing a technical error in the TCJA. Taxpayers can elect to waive the carryback altogether or to forgo applying the carryback to a Section 965 year, but cannot otherwise elect any alternate carryback period. NOLs will be carried back to the earliest available year first. The legislation also temporarily suspends the TCJA provision that limited NOL usage to 80% of taxable income. The limit will not apply for tax years beginning before Jan. 1, 2021.
Filing procedures for waiving the two-year or five-year carryback
The procedures and deadlines for waiving the five-year or two-year carryback periods allowed under the CARES Act depend on the tax year in which the NOL arises:
Grant Thornton Insight: The procedures generally will not require amending returns except for the return for the non-calendar tax year straddling 2017 and 2018. Taxpayers who have already filed more than one tax return over 2018 and 2019 in which a NOL carryforward was restricted by the 80% taxable income limitation may also amend their return to allow full NOL usage and obtain a refund.
Filing procedures for excluding the Section 965 year
- For a non-calendar tax year beginning in 2017 and ending in 2018, taxpayers must file an amended return by July 27, 2020, containing only the taxpayer’s name, address, and taxpayer identification number, and attach a statement with details on the election.
- For tax years beginning in 2018 or 2019, taxpayers make the election on the tax return for the first tax year ending after March 27, 2020, by the extended due date of the return. For calendar year taxpayers, this would mean making the election on the 2020 return by Oct. 15, 2021.
- For tax years beginning in 2020, the election will be made on the return.
Taxpayers using the five-year carryback period for an NOL arising in a year beginning in 2018, 2019, and 2020 may elect to forego applying the carryback to any Section 965 year:
- For tax years beginning in 2018 or 2019, taxpayers make the election by the extended due date for the first tax year ending after March 27, 2020. For calendar-year taxpayers, this would mean making the election on the 2020 return by Oct. 15, 2021.
- For tax years beginning in 2020, the election must be made by the extended due date of the return.
To make the election, taxpayers must attach a statement to whichever is filed first, the income tax return for the year in which the loss arises, the tentative refund claim on Form 1045 or Form 1139, or, if amending returns instead of using the tentative refund, the earliest amended tax return to which the NOL is carried back. A taxpayer claiming refunds by amending returns must also attach the election statement to each amended return.
Grant Thornton Insight: The election to forgo applying the carryback to the Section 965 inclusion year will be critical. If the election is not made, the taxpayer will be deemed to make an election under Section 965(n), which means the NOL will not apply to Section 965 income. However, even if the NOL is used to offset other taxable income in that year, it is not clear whether the IRS will issue a refund. Under current IRS guidance, it appears the IRS would apply the decrease in liability to the taxpayer’s outstanding Section 965 installment payments until the entire Section 965 liability is fully satisfied. In addition, there are technical considerations if regular tax liability was fully offset by an NOL carryforward, but the original amount of the Section 965 inclusion exceeded the total balance of available NOL carryforwards.
Refund procedures for applying the NOL to prior years
Taxpayers have two options for applying the NOL carryback to prior years and claiming the refund. They may amend the returns for all of the carryback years or file for a tentative refund claim on Form 1139 (corporations) or Form 1045 (individuals). Filing a tentative refund claim typically results in a faster refund. The IRS has a 90-day period to conduct a limited examination or review of the application for omissions or errors and can either allow or deny the application.
Tentative refund claims cannot be filed before the return for the year in which the NOL arises is filed and normally cannot be filed more than 12 months after the close of that year. The IRS guidance extends the time period for taxpayers to file a Form 1139 or Form 1045. The IRS is extending the due date six months, for a total of 18 months, for filing a tentative refund claim for tax years beginning after Dec. 31, 2017, and ending on or before June 30, 2019. This means that calendar-year taxpayers have until June 30, 2020, to file a claim for 2018. For non-calendar tax years beginning in 2017 and ending in 2018, taxpayers have until July 27, 2020, to file the tentative refund claim, the same date their elections to waive the carryback period are due.
In addition, the IRS has provided special temporary procedures for filing Forms 1139 and 1045 by fax to claim a five-year NOL carryback refund or AMT credit refund under the CARES Act. Beginning on April 17, 2020, the IRS is allowing taxpayers to fax eligible refund claims on Form 1139 to 844-249-6236 and to fax eligible claims on Form 1045 to 844-249-6237. The fax numbers will not be operational before April 17. All faxed claims will be processed by order of receipt. Taxpayers that have already mailed an eligible claim may submit the same claim via fax.
Grant Thornton Insight: It appears that a faxed claim will provide the fastest way to obtain a refund as the center processing written claims is operating at limited capacity. The IRS has not yet updated the instructions for Form 1139 or 1045 to account for the new Section 965 rules and other changes, but is still accepting claims. It is unclear when new instructions will be released, and taxpayers should remember that the IRS will process claim by order of receipt. The IRS is also accepting AMT refund claims of the Form 1139, although it has not yet provided explicit instructions for how to show the claim on the current form.
Partnerships impacted by these rules should also consider the IRS’s guidance in Rev. Proc. 2020-23
, which provides for partnerships subject to the centralized partnership audit rules of the Bipartisan Budget Act of 2015 to file amended returns for tax years beginning in 2018 or 2019, rather than being forced to file an administrative adjustment request (AAR). The filing of an AAR may be administratively burdensome.
The expedited filing procedures for five-year NOL carryback refund claims can offer not only immediate cash-flow flexibility, but also valuable rate arbitrage. The ability to carry back losses to years in which a 35% top corporate rate applies offers a unique opportunity to enhance the benefit with accounting method changes or other elections and decisions on the timing of deductions and income. This not only has the potential to accelerate deductions and increase immediate refund amounts, but also to offer a permanent benefit. For example, a corporate taxpayer using timing strategies to increase the five-year NOL carryback in a loss year and move the income into a profitable year at the 21% rate results in a permanent benefit for any NOL used against the 35% rate. Modeling the benefit is important, however, because timing changes that reduce income before creating a loss will be used against the 21% rate. Taxpayers may need to balance immediate cash flow versus overall benefit.
For more information contact:
Managing Director, Washington National Tax Office
+1 202 521 1503
Partner, Washington National Tax Office
+1 202 521 1563
To learn more visit gt.com/tax
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