The IRS issued proposed (REG-125716-18) and temporary regulations (T.D. 9900) to provide guidance for consolidated groups on the treatment of net operating losses (NOLs) after recent statutory changes.
Both the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, amended the rules for NOLs. As a result of those amendments, an NOL deduction is the sum of:
- The total of NOLs arising before Jan. 1, 2018 (pre-2018 NOLs) that are carried to that year; plus
- The lesser of:
- The total of NOLs arising after Dec. 31, 2017; or
- 80% of taxable income less pre-2018 NOLs (the 80% limitation).
The TCJA eliminated NOL carrybacks and permitted NOLs to be carried forward indefinitely. The TCJA also provides special rules for nonlife insurance companies and farming losses. Nonlife insurance companies are permitted to carry back NOLs two years and forward 20 years, and the 80% limitation does not apply. Farming losses are permitted to be carried back two years and carried forward indefinitely, subject to the 80% limitation.
As one of the congressional responses to the coronavirus pandemic, the CARES Act delays the application of the TCJA’s NOL amendment until Jan. 1, 2021. The CARES Act also permits a five-year carryback for NOLs, including farming losses and NOLs of nonlife insurance companies, for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2021.
The proposed regulations explain how the 80% limitation on post-2017 NOLs applies to consolidated groups. In addition, the proposed regulations propose to remove obsolete provisions from the rules for consolidated groups that contain both life insurance companies and nonlife insurance companies.
The temporary regulations apply to consolidated groups that acquire new members that were members of another consolidated group. Because the CARES Act allows certain NOLs to be carried back five years, the temporary regulations allow acquiring consolidated groups to elect in a year after the year of acquisition to waive all or a portion of the pre-acquisition portion of the extended carryback period for certain losses attributable to the acquired members.
The IRS is requesting comments on the proposed regulations by Aug. 31. The temporary regulations are effective July 2, 2020.
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 COVID-19: Tax resources page.
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.