The Tax Cuts and Jobs Act of 2017 reduced the ability of most businesses to carry-back net operating losses while providing for unlimited carryforwards. As a result of COVID-19, and the government’s desire to help struggling businesses, recently enacted legislation (commonly referred to at the CARES Act) modifies the Net Operating Loss (NOL) rules (see our article, CARES Act - Modifications for Net Operating Losses). In summary, the CARES Act restores the ability to carryback losses for 2018, 2019, and 2020. However, special guidance was needed for certain special situations. Late in the afternoon of April 9, 2020, the IRS released additional guidance related to these situations.
First, Revenue Procedure 2020-24 provides guidance for taxpayers wishing to waive the five-year carryback provision. 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. However, in many instances, returns have already been filed for those tax years and the general rules provide it is too late to file a timely election to forego the carryback period. However, the notice provides guidance that allows, when desired, an election to forgo a carryback can 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. Taxpayers make the election by attaching a separate statement for each of the taxable years 2018 or 2019 for which the taxpayer intends to make the election to its Federal income tax return filed for the first taxable year ending after March 27, 2020. The election statement must state that the taxpayer is electing to apply §172(b)(3) under Rev. Proc. 2020-24 and indicate the taxable year the election applies. Once made, the election is irrevocable. For tax returns already filed for 2018 and 2019, this procedure alleviates the need to file amended returns for those years when there are no other changes to those returns.alleviates the need to file amended returns for those years when there are no other changes to those returns.
Second, Rev. Proc. 2020-24 also provides guidance for fiscal year taxpayers with an NOL and having a taxable year beginning before January 1, 2018 and ending after December 31, 2017. Taxpayers in this instance can make an application by filing either Form 1045 or Form 1139, as applicable, with respect to a carryback of such NOL. Under this special rule, a taxpayer will be treated as having timely filed the election if the application is filed no later than July 27, 2020. Similarly, elections can be made to (i) waive any carryback period, (Ii) to reduce any carryback period, or 9iii) revoke any election made under § 172(b) to waive any carryback period; taxpayers will be treated as timely filing these elections if filed no later than July 27, 2020
Finally, in Notice 2020-26, the IRS will grant a six-month extension of time to file Form 1045 or Form 1139, as applicable, for taxpayers with an NOL that arose in a taxable year beginning during calendar year 2018 and ending on or before June 30, 2019. While these NOL’s can be claimed filing amended returns (Form 1040-X or Form 1120-X), many taxpayers choose to file using the more quick tentative refund filing options using Form 1045 for individuals and Form 1139 for corporations. The extension of time provided under Notice 2020-26 is limited to requesting a tentative refund to carry back an NOL and does not extend the time to carry back any other item. For example, in the case of an NOL that arose in a taxable year ending on December 31, 2018, a taxpayer normally would have only until December 31, 2019, to file the Form 1045 or Form 1139, as applicable. Due to this relief, a taxpayer will now have until June 30, 2020, to file the Form 1045 or Form 1139.
To take advantage of the extension of time provided by the notice, a taxpayer must perform the following actions:
(a) 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); and
(b) Include on the top of the applicable form “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”
If you have any questions regarding the above or any other COVID-19 legislation, do not hesitate to contact a member of Schneider Downs & Co., Inc.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.