8 CARES Act FAQs on NOL and Excess Business Loss Rules for Individuals

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (the Act) contains two tax provisions that permit certain individuals to claim additional losses and obtain tax refunds for 2018, 2019 and 2020. Section 2303 of the Act makes changes to the net operating loss (NOL) deduction rules, and Section 2304 modifies the excess business loss rules. This alert addresses these changes for individual taxpayers in a question and answer format.

Section 2303 of the Act amended IRC Section 172 such that:

  • The 80 percent of taxable income limitation does not apply to NOLs arising in 2018, 2019 or 2020.
  • Any NOL arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, generally must be carried back to each of the five taxable years preceding the taxable year in which the loss arises. As a result, taxpayers must generally take into account such NOLs in the earliest taxable year in the five-year carryback period, and carry forward the unused amount to each succeeding taxable year. However, taxpayers are permitted to make an irrevocable election to relinquish the NOL carryback period for any taxable year.

Section 2304 of the Act amended IRC Section 461 such that:

  • The $250,000 (or $500,000 for married taxpayers filing jointly) limitation on excess business losses for non-corporate taxpayers does not apply until January 1, 2021. As a result, affected taxpayers may be able to fully deduct business losses arising in 2018, 2019 and 2020.
  • An excess business loss for a taxable year is determined without regard to any:
    1. NOL deduction;
    2. Qualified Business Income deduction;
    3. Capital loss deduction; and
    4. Deductions, gross income or gains attributable to any trade or business of performing services as an employee.
  • The amount of net capital gain included in the excess business loss calculation may not exceed the lesser of the taxpayer’s:
    1. Net capital gain attributable to trades or businesses; or
    2. Total net capital gain.

Questions and Answers

1. How does an individual taxpayer claim an NOL carryback?

Individual taxpayers may claim an NOL carryback by either filing an amended tax return (Form 1040X) for the carryback year or by filing an application for a tentative refund (Form 1045).

2. How long does an individual taxpayer have to file an amended return to claim an NOL carryback?

The deadline to file an amended return to claim an NOL carryback is three years from the due date, including extensions, for filing the return for the year the NOL was generated. For example, if an individual taxpayer incurred a net operating loss in 2020, the taxpayer has until April 15, 2024 (or until October 15, 2024, including extensions) to file an amended return for the carryback year.

3. What are the benefits of filing Form 1045?

The IRS generally must process and act on an application for tentative refund (Form 1045) within 90 days from the date the application is filed. As a result, taxpayers can typically receive a refund associated with an NOL carryback quicker by filing Form 1045 rather than filing an amended tax return.

However, the deadline for filing a Form 1045 is normally only 12 months from the end of the year in which the loss was generated. For example, if an individual taxpayer sustains an NOL in 2020, the due date for filing Form 1045 is December 31, 2021.

4. Can an individual taxpayer still file a Form 1045 for an NOL generated in 2018?

Yes. Notice 2020-26 grants a six-month extension of time to file Form 1045 to individual taxpayers that have an NOL that arose in 2018. To take advantage of this extension, these taxpayers must:

  • File Form 1045 no later than June 30, 2020; and
  • Include at the top of the Form 1045 “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.

5. Can Form 1045 be faxed to the IRS?

Yes. Starting on April 17, 2020, Form 1045 may be faxed to the IRS at 844-249-6237. This temporary filing procedure enables the IRS to process refund claims even though the IRS processing centers are closed due to COVID-19.

6. Can individual taxpayers waive the NOL carryback period?

Yes. IRC Section 172(b)(3) permits an individual taxpayer to elect to relinquish the entire carryback period with respect to any NOL for any taxable year. The election generally must be made by the due date, including extensions, for filing the taxpayer’s federal income tax return for the year the NOL arose. If such an election is made, the NOL must be carried forward.

In the case of an NOL arising in 2018 or 2019, Revenue Procedure 2020-24 provides that the election to waive the carryback period must:

  • Be made no later than the due date, including extensions, for filing the taxpayer’s 2020 federal income tax return;
  • Be attached to the taxpayer’s 2020 federal income tax return;
  • Contain a separate statement for each of the taxable years (2018 and/or 2019) for which the taxpayer intends to make the election; and
  • State that the taxpayer is electing to apply IRC Section 172(b)(3) under Rev. Proc. 2020-24 and indicate the taxable year for which the election applies.

7. Does the limitation on excess business losses apply in 2018, 2019 and 2020?

No. The Act retroactively changed the effective date of the limitation on excess business losses to January 1, 2021. (The limitation is still set to expire on December 31, 2025.) As a result, individual taxpayers that incurred an excess business loss limitation in 2018 and/or 2019 should consider amending their 2018 and/or 2019 income tax return(s) to remove the limitation.

8. How will excess business losses be calculated in 2021 through 2025?

The Act changed the calculation of an excess business loss. As a result, when IRC Section 461(l) comes into effect in 2021, an excess business loss will be determined without including:

  • Net operating loss and Qualified Business Income deductions
  • Deductions, gross income and gains attributable to performing services as an employee
  • A net capital loss

In addition, the amount of net capital gain included in the excess business loss calculation may not exceed the lesser of the taxpayer’s:

  1. Net capital gain attributable to trades or businesses; or
  2. Total net capital gain.

During this unprecedented time, Weaver remains vigilant in serving our clients and monitoring tax changes to keep you informed. Our teams are working remotely even during local and national movement restrictions, and we are here to assist with meeting your needs and deadlines.

If you have questions or need advice on your specific situation, please contact us. We’re here to help.

© 2020

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