12 CARES Act FAQs on Modifications of Corporate NOL Rules

The CARES Act (the Act) provides numerous favorable tax-related provisions, including Section 2303, which changes the net operating loss (NOL) deduction rules. Under these newly enacted rules, taxpayers can claim additional losses and obtain tax refunds for net operating losses generated in 2018, 2019 and 2020. This alert addresses the application of Section 2303 to corporate taxpayers in a question and answer format.

Background

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, must generally 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.  Taxpayers are permitted, however, to make an irrevocable election to relinquish the carryback period for an NOL for any taxable year.

Notice 2020-26 extends the deadline for filing an application for a tentative refund for the carryback of an NOL that arose in any taxable year that began during calendar year 2018 and that ended on or before June 30, 2019.

Frequently Asked Questions

1. How does a taxpayer claim an NOL carryback?

Taxpayers may claim an NOL carryback by either filing an amended tax return (Form 1120X) for the carryback year or by filing an application for a tentative refund (Form 1139). 

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

The deadline for filing 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 a corporate 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, which now would be 2015.

3. What are the benefits of filing Form 1139?

The IRS generally must process and act on an application for tentative refund (Form 1139) within 90 days from the date the application is filed. As a result, taxpayers can typically file a Form 1139 to receive a refund associated with an NOL carryback quicker than filing an amended tax return.

However, the deadline for filing a Form 1139 is normally only 12 months from the end of the year in which the loss was generated. For example, if a calendar year taxpayer sustains an NOL for 2020, the due date for filing a Form 1139 is December 31, 2021.

4. Can a taxpayer still file a Form 1139 for an NOL generated in 2018?

Yes. Notice 2020-26 grants a six-month extension of time to file a Form 1139 to taxpayers that have an NOL that arose in a taxable year that began in calendar year 2018 and that ended on or before June 30, 2019. To take advantage of this extension, taxpayers must:

• File Form 1139 no later than 18 months after the close of the taxable year in which the NOL arose (e.g., no later than June 30, 2020, for a taxable year ending December 31, 2018); and
• Include at the top of the Form 1139, “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”

5. Can a taxpayer still file a Form 1139 for a fiscal year corporation?

Yes. Revenue Procedure 2020-24 grants relief for fiscal year corporations with an NOL arising in a taxable year that began before January 1, 2018 and ended after December 31, 2017. Revenue Procedure 2020-24 extends the due date for such taxpayers to file a Form 1139 for such NOL until July 27, 2020. The Form 1139 must include the phrase, “Filed pursuant to Rev. Proc. 2020-24” at the top of the form.

6. Can taxpayers waive the NOL carryback period?

Yes. IRC Section 172(b)(3) permits a taxpayer to elect to relinquish the entire carryback period with respect to any NOL for any taxable year. If such an election is made, the NOL can only be carried forward.

Taxable Year – 2017

In the case of an NOL arising in a taxable year beginning before January 1, 2018, and ending after December 31, 2017, the election to waive the carryback period must be made by July 27, 2020. The election can be made on Form 1120X or Form 1139 that contains only the taxpayer’s name, address and taxpayer identification number. The election must 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. In addition, the election should contain “Filed pursuant to Rev. Proc. 2020-24” at the top of the election statement.

Taxable Years – 2018 and 2019

In the case of an NOL arising in a taxable year beginning 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 federal income tax return for the first taxable year ending after March 27, 2020;
• Be attached to the taxpayer’s federal income tax return filed for the first taxable year ending after March 27, 2020;
• 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.

Taxable Year – 2020

In the case of an NOL arising in a taxable year beginning in 2020, the election to waive the carryback period must be made no later than the due date, including extensions, for filing the taxpayer’s 2020 income tax return. The election must 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. How does the carryback interact with the alternative minimum tax (AMT)?

For tax years beginning prior to January 1, 2018, AMT applied to corporations. The Act eliminates the AMT regime for corporate taxpayers for tax years beginning after December 31, 2017 and provides for an immediate refund of any AMT tax credits that were generated prior to that date.  For taxpayers that have both AMT credits carrying forward into the 2018 year and an NOL available for carryback under the provisions of the Act, the NOL carryback claim must be made first. The NOL carryback claim will need to consider both “regular” NOL and AMT NOL. The NOL carryback claim would presumably be made by filing Form 1139. Any AMT credits that exist after the NOL carryback claim would be available for refund by filing a Form 1120X for the 2018 or 2019 tax year.

8. Are there special carryback waiver rules for Section 965 years?

Yes. Taxpayers can make an irrevocable election to exclude from the five-year NOL carryback period all years in which the taxpayer included deferred income from foreign subsidiaries under IRC Section 965(a) (“Section 965 Years”). For an NOL arising in a taxable year beginning in 2018 or 2019, Rev. Proc. 2020-24 provides that an election to exclude from the carryback period all Section 965 Years must be made no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the first taxable year ending after March 27, 2020. For an NOL arising in a taxable year beginning during calendar year 2020, Rev. Proc. 2020-24 provides that an election to exclude from the carryback period all Section 965 Years must be made by no later than the due date, including extensions, for filing the taxpayer’s 2020 federal income tax return.

To make the election, a taxpayer must attach an election statement to one of the following documents, whichever is filed first:

• The federal income tax return for the taxable year in which the NOL arises;
• A Form 1139 applying the NOL to a taxable year in the carryback period; or
• An amended federal income tax return applying the NOL to the earliest year in the carryback period that is not a Section 965 Year.

The election statement must state that the taxpayer is electing to apply IRC Section 172(b)(1)(D)(v)(I) under Rev. Proc. 2020-24, indicate the taxable year in which the NOL arose, and identify the taxpayer’s Section 965 Years.

9. Why would a taxpayer consider excluding the carryback to a Section 965 tax year?

Many taxpayers managed their Section 965 liability through the utilization of foreign tax credits, which means that a taxpayer would need to consider whether an NOL carryback to a Section 965 tax year would reduce the amount of foreign tax credits available to offset their transition tax liability. If the foreign tax credits are reduced, this would in effect increase the Section 965 tax liability.

In addition, taxpayers that carryback an NOL to a Section 965 tax year are treated as making a Section 965(n) election. This effectively means that an NOL carryback does not reduce the tax liability under Section 965.

Furthermore, taxpayers that made an election to pay their Section 965 liability in installments would not receive a cash refund unless the refund exceeds the entire unpaid income tax liability for the section 965 tax year, including the unpaid installment liability.

10. If a taxpayer excludes Section 965 tax years from the carryback period, is the Section 965 tax year counted in determining the five-year carryback period?

Yes. The Section 965 tax year is counted as a tax year regardless of whether or not the taxpayer elects to exclude the carryback to a Section 965 tax year. This means if a taxpayer generates an NOL in 2020, it can only carry back the NOL to tax years as early as 2015 regardless of whether or not the taxpayer elected to exclude the carryback to a Section 965 tax year.

11. If a taxpayer carries back an NOL to a transition tax year, does the Section 965(n) apply to all NOLs?

No. The deemed Section 965(n) election only applies to the carryback of an NOL. This means if a taxpayer had originally reduced the transition tax liability with an NOL carryforward or an NOL generated in the transition tax year, these NOLs would not be impacted by the deemed Section 965(n) election.

12. Can taxpayers use Form 1139 for refund claims in a Section 965 inclusion tax year?

Yes. The IRS recently provided a Q&A noting that taxpayers may disregard the instructions for Form 1139, which prohibit taxpayers from using these forms to apply for refunds in Section 965 tax years.

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

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