Underpayment penalty relief for individuals affected by excess business loss repeal

By Sally P. Schreiber, J.D.

The IRS announced that the Sec. 6654 addition to tax on the underpayment of estimated income taxes will be waived for certain individuals where the underpayment is solely attributable to the recent repeal of the excess business loss limitations (Notice 2021-8). Sec. 461(I)(1)(B), which was amended by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, repealed the excess business loss limitations enacted in the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, for years beginning before Jan. 1, 2021. Taxpayers may not elect out of this change.

The TCJA limited individuals from using more than $250,000 ($500,000 for married taxpayers filing jointly) of business losses to offset nonbusiness income. An individual taxpayer may have underpaid one or more installments of estimated income tax for the 2019 tax year if the individual anticipated owing less tax after using a net operating loss (NOL) carryover attributable to a prior-year excess business loss that, before the enactment of the CARES Act, would have been available as an NOL carryover to reduce taxable income in the 2019 tax year but now is no longer available due to the CARES Act's amendment to Sec. 461(l)(1)(B). Such a taxpayer may be liable for an addition to tax for underpayment of estimated income tax for the 2019 tax year.

To qualify for a waiver, an individual taxpayer must have a 12-month tax year and have timely filed a 2018 original income tax return reporting an excess business loss. The penalty waiver applies only to calculations of an individual taxpayer's installments of estimated income tax that were due on or before July 15, 2020, for the tax year that began during 2019. It does not apply to calculations of the amounts of installments of estimated income tax of an individual taxpayer due after July 15, 2020. The relief also applies to any qualifying estate or trust that is treated as an individual for Sec. 6654 purposes and that is subject to the Sec. 6654 estimated tax payment requirements.

The waiver is not automatic. A taxpayer must request the waiver in accordance with all of the requirements described in Section 4.02(3) of Notice 2021-8. Among these requirements is that the individual taxpayer must timely file an original income tax return for the affected tax year that began during 2019 and correctly account for the CARES Act amendment to Sec. 461(l)(1)(B) on the original income tax return for that tax year and complete 2019 Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, or Form 2210-F, Underpayment of Estimated Tax by Farmers and Fishermen,having recalculated the amount of tax due according to the notice.

The IRS emphasized that this relief is not available for underpayments due to the CARES Act amendments to the NOL provisions in Sec. 172(b) because a taxpayer may elect out of the new five-year carryback period for NOLs.

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