NOL carryback, Section 965 inclusion FAQ issued

Tax Hot Topics newsletter The IRS has released frequently asked questions (FAQ) on carrybacks of net operating losses (NOLs) for taxpayers who have had Section 965 inclusions.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act amended Section 172(b)(1) to allow taxpayers to carryback NOLs arising in taxable years beginning after Dec. 31, 2017, and before Jan. 31, 2021. However, if a taxpayer carries back losses to a taxable year that includes Section 965 income, the taxpayer would be deemed to have made a Section 965(n) election not to apply the NOL deduction with respect to such taxable year, and the taxpayer would be unable to apply the NOL to reduce its Section 965 transition tax inclusion. The CARES Act added Section 172(b)(1)(D)(v)(I) to allow taxpayers to elect to exclude Section 965 tax years from the five-year NOL carryback period. Also, under Section 172(b)(3), a taxpayer may waive the entire carryback period with respect to both Section 965 years and non-Section 965 years.

The IRS previously issued Rev. Proc. 2020-24, providing guidance on how taxpayers can make the elections in connection with these NOL carrybacks, and Notice 2020-26 extending the deadline for filing an application for a tentative refund for certain NOL carrybacks. Furthermore, the IRS provided guidance on filing Forms 1139 and 1045 to claim refunds under the new NOL carryback provisions.

The FAQ addresses several ongoing questions and issues related to these elections and procedures, and largely follow the guidance provided in Rev. Proc. 2020-24 and Notice 2020-26. Specifically, it clarifies several noteworthy issues, including but not limited to:

  • How to exclude only the Section 965 inclusion years from the five-year NOL carryback period. Of note, in providing the procedures for making the election, the FAQ provides that a taxpayer must make the election to exclude “all” Section 965 years from the carryback period. This means that if a taxpayer had Section 965 inclusions for taxable years ending in 2017 as well as 2018, the taxpayer would be required to exclude the carrybacks from both years.
  • A taxpayer must fully satisfy their Section 965(h) liability before they may receive a refund or credit of any portion of properly applied Section 965 year income inclusion tax payments. The taxpayer then may claim a refund by filing a Form 1139 or Form 1045.
  • Finally, the FAQ encourages taxpayers to file an amended return for their Section 965 inclusion year to properly reflect the carryover of non-NOL attributes into the Section 965 inclusion year, and to avoid potential procedural issues. Taxpayers should not use the temporary procedures reserved for submission of claims on Forms 1139 and 1045 to fax amended returns.

The CARES Act coupled with the FAQ, Rev. Proc. 2020-24 and Notice 2020-26 provide important guidance and procedures. Taxpayers should carefully review these procedures and consider them in connection with NOL carryback claims in cases where taxpayers have Section 965 inclusions. For an NOL arising in a tax year beginning in 2018 or 2019, a taxpayer must make the election to waive the entire carryback period or to exclude Section 965 inclusion years from the carryback period by the due date for filing their return (including extensions). For NOLs arising in a tax year beginning in 2020, the election should be made by the due date for filing the 2020 tax return (including extensions).

David Sites
Washington National Tax Office
T +1 202 861 4104

David Zaiken
Managing Director
Washington National Tax Office
T +1 202 521 1543

Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

Yasmin Dirks
Washington National Tax Office
T +1 202 521 1506

Mike Del Medico
Washington National Tax Office
T +1 202 521 1522

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.