Farm businesses receive guidance on tax treatment of losses

By Paul Bonner

The IRS issued Rev. Proc. 2021-14 on Wednesday instructing taxpayers with a net operating loss (NOL), consisting entirely or partly of a “farming loss,” as defined in Sec. 172(b)(1)(B)(ii), on how to make or revoke certain elections including those available under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136.

For most taxpayers, the treatment of NOLs was changed by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, for NOLs arising in tax years beginning after Dec. 31, 2017, by limiting their amount allowed as a deduction in a tax year to 80% of taxable income (computed without the NOL deduction), with no carryback allowance as formerly. Any portion of an NOL that is a farming loss, however, (as defined under Sec. 172(b)(1)(B)(ii)) could be carried back two years, which the taxpayer could (irrevocably) elect to waive.

The CARES Act suspended the 80% limitation for NOLs, including those consisting of or including farming losses (farming loss NOLs), arising in tax years beginning in 2018, 2019, or 2020, which may be carried back five years, with the two-year carryback for farming losses not an option. However, the CARES Act was then amended by the COVID-Related Tax Relief Act (CTRA) of 2020 (Subtitle B of Division N of the Consolidated Appropriations Act, 2021, P.L. 116-260) to allow taxpayers to elect to disregard those CARES Act provisions for farming loss NOLs (CTRA election).

For taxpayers making that election, the revenue procedure states these consequences will result:

  • The 80% limitation applies to determine the amount of an NOL deduction for tax years beginning in 2018, 2019, or 2020, to the extent the deduction is attributable to NOLs arising in tax years beginning after Dec. 31, 2017.
  • The CARES Act carryback provisions do not apply for NOLs arising in tax years beginning in 2018, 2019, or 2020.

For example, the IRS said, if a taxpayer with an NOL that includes a farming loss in 2018 makes the CTRA election, only the farming loss portion can be carried back two years, and no portion that is not a farming loss may be carried back (except for those of certain life insurance companies, which have their own carryback provision under the TCJA).

The CTRA election — affirmative or deemed

To make an affirmative CTRA election, which is irrevocable, taxpayers must make the election by the due date, including extensions, of their income tax return for the first tax year ending after Dec. 27, 2020. To make the election, the taxpayer must attach to that return a statement worded as specified in Section 3.01(2)(b) of the revenue procedure. The taxpayer should also attach a copy of the statement to any original or amended federal income tax return or application for tentative refund on which the taxpayer claims a deduction attributable to a two-year NOL carryback pursuant to the affirmative election.

Taxpayers are treated as having made a deemed CTRA election if, before Dec. 27, 2020, they filed one or more original or amended income tax returns, or applications for tentative refund, that disregard the CARES Act provisions with respect to a farming loss NOL. However, they will not be treated as having made this deemed election if they subsequently file either an amended return by the due date, including extensions, for filing an income tax return for the first tax year ending after Dec. 27, 2020, or a timely application for tentative refund, that properly reflects the treatment of each farming loss NOL under the CARES Act provisions.

Revoking a waiver of carryback periods

A taxpayer who elected before Dec. 27, 2020, to not apply a two-year carryback period to a farming loss portion of a farming loss NOL in a tax year beginning in 2018 or 2019 may revoke that election by attaching to the amended return for the loss year a statement as worded in Section 4.01(2)(b) of the revenue procedure by the date that is three years after the due date, including extensions, for filing the return for the tax year in which the farming loss NOL was incurred.

The IRS also provided in the revenue procedure means by which taxpayers, whose two-year carryback claims filed before Dec. 27, 2020, were rejected by the Service, may continue to pursue those claims. In addition, the IRS provided procedures for taxpayers in controlled groups to make an affirmative or deemed election.

Paul Bonner (Paul.Bonner@aicpa-cima.com) is a Tax Adviser senior editor.

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