The CARES Act Temporarily Reintroduces NOL Carrybacks

By April 28, 2020 June 2nd, 2020 CARES Act
The CARES Act Temporarily Reintroduces NOL Carrybacks

Published: April 28th, 2020 at 3:18 PM PST | Updated: June 2nd, 2020 at 12:00 PM PST

As we continue to unpack the tax measures of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, one notable provision is the modification of net operating loss (NOL) rules.

As part of tax reform in 2017, the Tax Cuts and Jobs Act (TCJA) ceased the allowance of NOL carrybacks to offset taxable income in prior years. However, as we have seen in the past, NOL carryback rules frequently become more taxpayer-favorable during times of economic crisis. This time is no different, as the CARES Act temporarily permits NOL carrybacks.

How did the CARES Act modify NOLs?

Effectively, the CARES Act reintroduces NOL carrybacks as part of its goal to get cash quickly into the hands of taxpayers impacted by the COVID-19 outbreak. More specifically, the legislation:

→ View Now: NOL (Corporate/Individual) Webinar Recording

  1. Provides a five-year carryback of NOLs for years beginning after December 31, 2017 and before January 1, 2021.
  2. Suspends the 80% limitation on NOLs arising in years beginning after December 31, 2017 and used in years beginning before January 1, 2021.
  3. Clarifies the calculation of the 80% limitation for years beginning after December 31, 2020. Defines Taxable Income as income after the use of pre-2018 NOLs and before the deductions for § 199A (QBI) and § 250 (GILTI & FDII).
  4. Provides a technical correction for fiscal years beginning in 2017 and ending in 2018, which allows for a two-year carryback and 20-year carryforwards.
  5. Provides a technical correction for fiscal years beginning in 2017 and ending in 2018, which allows for a two-year carryback and 20-year carryforward.
  6. Provides for a refund of any AMT credit not already refunded on a 2018 return, either by a 2018 carryback claim or on the 2019 return.

NOL Carryback/Carryover/Limitations

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What does this mean for corporate NOL carrybacks?

For corporations assessing the new NOL carryback provisions, there are a few items to consider. For instance, the CARES Act allows for a corporation to elect out of a carryback. There are also special measures in place for REITs and insurance companies.

The bill provides special rules for carrybacks to Section 965 inclusion years:

  1. Taxpayer is deemed to have made a 965(n) election to waive the use of the NOL against the transition tax inclusion.
  2. Election is available to skip over 965 inclusion years in the carryback period.

Importantly, taxpayers can use the provisions to offset NOLs at a higher tax rate in pre-TCJA years, up to 35%.

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What does this mean for individuals?

Similar to businesses, the CARES Act modified the NOL carryback rules for individual taxpayers, and adjusted rules to other tax measures which may generate new NOLs.

For example, the legislation temporarily suspends excess business loss rules for 2018, 2019 and 2020. This is a dramatic change, as excess business losses were previously limited to $250,000 for individuals ($500,000 for married, filing jointly). Now if you had a business loss that was limited in 2018 or 2019 under the excess business loss rules, you may be able to obtain a refund by filing an amended tax return.

Also, the CARES Act reinstates NOL carrybacks generated in tax years beginning in 2018 through 2020. These NOL carrybacks can result in an immediate refund of taxes paid in prior years. In addition, NOL carrybacks present an opportunity to secure permanent tax savings by using the losses to offset income generated prior to the tax return when the tax rates were higher.

Another modification is the suspension of the 80% taxable income limitation through the 2020 tax year. Like their corporate counterparts, individuals also have the option to elect out of the carryback.

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How do these NOL modifications affect my tax planning?

Effectively, the CARES Act provides a number of new tax planning strategies in relation to the reintroduction of NOL carrybacks. Our Squar Milner tax experts have identified some interesting points of consideration:

  • To maximize your NOL carryback amount, consider accelerating deductions and deferring income.
  • You may be able to increase NOLs in 2019 and 2020 by way of accounting method changes.
  • Changes to interest deduction limitations from 30% to 50% of ATI and/or qualified improvement property (QIP) deductions may increase NOLs in 2019 and 2020.
  • Consider the consequences of carrying back losses to earlier years, which could affect calculations in the carryback years that are based on taxable income limitations (i.e. business interest, GILTI/FDII, 199A QBI deductions, charitable contributions).
  • Consider the consequences of carrying back losses to earlier years, which could affect calculations in the carryback years that are based on taxable income limitations (i.e. business interest, GILTI/FDII, 199A QBI deductions, charitable contributions).
  • For businesses with international operations that had deemed repatriation income in prior years, the use of NOLs does become more complex considering the 965(n), Subpart F, and Rev. Proc. 2020-24 (see below) rules. Consult with your tax advisor on how to address these complexities.

In order to take advantage of the changes to NOL rules, we recommend that you consider the following planning tips:

  • Revisit tax years 2013 through 2018
  • Accelerate deductions and defer income to maximize the amount of the NOL you can carry back
  • Consider accounting method changes to increase NOLs in 2019 & 2020
  • Changes to interest deduction limitations from 30% to 50% of ATI and/or QIP deductions may increase NOLs in 2019 & 2020
    • Can be used to offset NOLs at a higher tax rate in pre-TCJA years; thus translating into permanent tax savings

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What is the formal guidance on procedures and due dates?

Forms/Instructions

To take advantage of the rule changes, you will have to fill out the following IRS forms:

  • Corporations – Form 1139, Corporation Application for Tentative Refund
  • All Others (Individuals, trusts, and estates) – Form 1045, Application for Tentative Refund

Per IRS guidance, these forms may be temporarily faxed instead of paper filed. In addition, any exceptions require the filing of an amended return.

IRS Notice 2020-26 – Extension of Time for Filing of Tentative Refund Claims

IRS Notice 2020-26 provides an extension for NOL tentative refund carryback claims (Forms 1045 & 1139), relating to years beginning during calendar year 2018 and ending before June 30, 2019 by six months for a total of 18 months from the end of the tax year. Taxpayers with calendar years that have NOLs arising in 2018 have until June 30, 2020 to utilize the extended carryback filing time frame.

Rev. Proc. 2020-24 – Election Procedures for NOLs

Rev. Proc. 2020-24 outlines the procedures for how to waive the carryback for NOLs from 2018-2020 and the procedures for how to elect to exclude 965 inclusion years from the carryback. It also states that the due date for carrybacks of fiscal 2017 claims and any carryback elections related to this year is July 27, 2020.

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How can Squar Milner help?

The CARES Act provides considerable modifications to NOL carryback rules and opens up significant tax planning opportunities for both individuals and corporations.

Our tax experts are here to help you navigate those opportunities and determine the optimal path for you. Through these unprecedented times, we can answer any questions you may have or offer practical advice regarding NOL carrybacks or other stipulations of the CARES Act and other coronavirus-related legislation. Please don’t hesitate to reach out today.

For more information about NOL’s you can also check out our latest webinar on the topic, found here.

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KEY CONTACTS

Shawn Kato
Partner, Tax Services

skato@squarmilner.com

Justin Demere
Partner, Tax Services

jdemere@squarmilner.com

Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.

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