Guidance on NOL carryback and tentative carryback adjustments

The IRS provided guidance on how taxpayers who want to elect to waive or reduce the new provision requiring taxpayers with net operating losses (NOLs) arising in tax years beginning in 2018, 2019, and 2020 to carry them back five years (Rev. Proc. 2020-24). The IRS also extended the deadline for filing an application for a tentative carryback adjustment under Sec. 6411 to carry back an NOL that arose in any tax year that began during calendar year 2018 and that ended on or before June 30, 2019.

Section 2303(b) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, amended Sec. 172(b)(1) to provide for a carryback of any NOL arising in a tax year beginning after Dec. 31, 2017, and before Jan. 1, 2021, to each of the five tax years preceding the tax year in which the loss arises (carryback period) (Sec. 172(b)(1)(D)). Sec. 172(b)(3) permits a taxpayer entitled to a carryback period under Sec. 172(b)(1) to make an irrevocable election to relinquish the carryback period for an NOL for any tax year.

An election to waive Sec. 172(b)(3) carryback for NOLs arising in tax years beginning in 2018 or 2019 must be made no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the first tax year ending after March 27, 2020. A taxpayer makes the election by attaching to its federal income tax return filed for the first tax year ending after March 27, 2020, a separate statement for each of the tax 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 Sec. 172(b)(3) under Rev. Proc. 2020-24 and the tax year for which the statement applies.

The revenue procedure also explains how taxpayers that have an inclusion in income because of Sec. 965(a) in 2018, 2019, or 2020 can elect to exclude that year from the NOL carryback period. Those taxpayers may elect under Sec. 172(b)(1)(D)(v)(I) to exclude all Sec. 965 years from the carryback period for an NOL arising in a tax year beginning in 2018, 2019, or 2020. The election for an NOL arising in a tax year beginning in 2018 or 2019 must be made no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the first tax year ending after March 27, 2020.

For an NOL arising in a tax year beginning after Dec. 31, 2019, and before Jan. 1, 2021, an election must be made by no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the tax year in which the NOL arises. The election is made by attaching a statement to the return.

The revenue procedure further provides guidance regarding elections under the special rule in Section 2303(d) of the CARES Act to waive any carryback period, to reduce any carryback period, or to revoke any election made under Sec. 172(b) to waive any carryback period for a tax year that began before Jan. 1, 2018, and ended after Dec. 31, 2017.

In related guidance, Notice 2020-26 extends the deadline for filing an application for a tentative carryback adjustment under Sec. 6411 to carry back an NOL that arose in any tax year that began during calendar year 2018 and that ended on or before June 30, 2019.

Sec. 6411 allows a taxpayer to file an application for a tentative carryback adjustment of the tax liability for a prior tax year that is affected by a NOL carryback in Sec. 172(b) or by carrybacks provided for in other Code sections. Under Regs. Sec. 1.6411-1(b)(1), corporations must use Form 1139, Corporation Application for Tentative Refund, and taxpayers other than corporations must use Form 1045, Application for Tentative Refund. Sec. 6411(a) and Regs. Sec. 1.6411-1(c) both require that an application must be filed within 12 months of the close of the tax year in which the NOL arose. The tentative carryback adjustment procedure allows a taxpayer to obtain a quick tentative tax refund based on an NOL carryback. The IRS conducts a limited examination of the application and makes the resulting credit or refund within 90 days of filing the application.

The CARES Act did not provide additional time to file tentative carryback adjustment applications for NOLs arising in a tax year beginning on or after Jan. 1, 2018, and ending before March 27, 2019, even though the time to file those applications had expired when it was enacted. Taxpayers with losses in these tax years that may now be carried back to an earlier tax year will 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 Sec. 6411 tentative carryback adjustment procedure without an extension of time to file Form 1139 or Form 1045.

Therefore, the IRS is granting a six-month extension of time to file Form 1045 or Form 1139 for taxpayers that have an NOL that arose in a tax year that began during calendar year 2018 and that ended on or before June 30, 2019. This extension of time is limited to requesting a tentative refund to carry back an NOL and does not extend the time to carry back any other item.

To take advantage of this extension, taxpayers must file the form no later than 18 months after the close of the tax year in which the NOL arose (i.e., no later than June 30, 2020, for a tax year ending Dec. 31, 2018); and include on the top of the form “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”  

For more news and reporting on the coronavirus and how CPAs can handle challenges related to the pandemic, visit the JofA‘s coronavirus resources page.

For tax-related resources, visit the AICPA’s coronavirus (COVID-19) tax resources page.

— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.