Guidance Released for Taxpayers Claiming Net Operating Losses Under CARES Act

Treasury and the IRS released Rev. Proc. 2020-24 (available here), providing guidance related to amendments in the CARES Act (Pub. L. No. 116-136) to the net operating loss (NOL) provisions of the Code to allow for the carryback of losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021, to the prior five tax years. The CARES Act changes allow taxpayers to carry back NOLs to the earliest taxable year in the carryback period and to carry forward unused amounts to each succeeding taxable year. Prior to the amendment, no carryback of NOLs was permitted. The CARES Act also removed the limitation allowing NOLs to offset no more than 80 percent of taxable income for tax years beginning before January 1, 2021.

Rev. Proc. 2020-24 establishes rules and procedures for:

• Waiving the five-year carryback period in the case of an NOL arising in a taxable year beginning after December 31, 2017, and before January 1, 2021 (i.e., electing instead to carry forward the NOL to subsequent tax years). While an NOL carryback may generate an immediate refund, taxpayers such as those with income during the carryback period in excess of the NOL carryback may want to model the impact of electing out. Also, corporate taxpayers should consider the added benefit of the carry back of NOLs to pre-2018 tax years when the corporate rate was 35 percent instead of the current 21 percent.
• Either disregarding certain amounts of foreign income subject to transition tax (pursuant to IRC Section 965) that would normally have been included as income during the five-year carryback period or electing to exclude an IRC Section 965 year from the carryback period. The transition tax was a one-time tax on a U.S. shareholders’ share of untaxed foreign earnings of certain specified foreign corporations in the taxpayers’ last tax year beginning before January 1, 2018. The CARES Act prohibits NOL carrybacks from offsetting this transition tax income. Therefore, taxpayers must determine whether to (i) calculate their NOL deduction without taking into account such income in those tax years or (ii) elect to exclude from the five-year carryback the transition tax year or years.
• Waiving a carryback period, reducing a carryback period, or revoking an election to waive a carryback period for a taxable year that began before Jan. 1, 2018, and ended after Dec. 31, 2017.

Related guidance in Notice 2020-26 (available here) also extends by six months the deadline for filing an application for a tax refund for tax returns from prior tax years resulting from the carryback of an NOL that arose in any tax year that began during calendar year 2018 and that ended on or before June 30, 2019. For calendar year taxpayers with 2018 NOLs, the carryback adjustment must be filed no later than June 30, 2020. Individuals, trusts, and estates would file Form 1045, and corporations would file Form 1139. According to an IRS FAQ (available here) issued on April 13, 2020, taxpayers will temporarily be able to fax these forms to the IRS and to use them even if the carryback period includes an IRC Section 965 year. As described in a prior alert (available here), eligible partnerships may also amend prior year returns and issue amended K-1s pursuant to Revenue Procedure 2020-23.

For questions about this relief or other tax issues, contact a member of the Ballard Spahr Tax Group.

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