With the passing of the Tax Cuts and Jobs Act (TCJA) of 2017, there were changes made to how Net Operating Losses (NOLs) could be deduced. With the changes, NOLs no longer could be carried back two years and forward 20-years, but could now be carried forward indefinitely. The TCJA also limited NOL deductions to 80% of taxable income. The Coronavirus Aid, Relief and Economic Security (CARES) Act now allows NOLs arising in 2018, 2019 and 2020 to be carried back to each of the five tax years preceding the loss. The CARES Act has also temporarily removed the 80% limitation on NOL deductions.
As a result of the changes, corporate taxpayers may be able to claim a refund from prior tax years. IRC Section 172(b)(3) was not modified, so a taxpayer can still waive the carryback and elect to carry NOLs forward. With the change in the corporate tax rate, the carryback can be extremely valuable as the maximum corporate tax rate for tax years being before 2018 was 35%. In 2018 the tax rate was reduced to 21% as part of the TCJA. Before electing to claim a NOL carryback, it is important to understand the impact that it will have on other tax items.
How do you apply an NOL to a prior tax year?
If a business elects to carryback a NOL, they can amend prior-year returns to claim the deduction. Generally, NOLs must be carried back to the earliest year in the five-year period in which there is taxable income. The entity cannot pick and choose what years to apply the NOL. It is important to note that a NOL cannot be carried back until the return for the tax year of which the NOL generated is filed.
The fastest way to obtain a refund from an NOL carryback is to request a tentative refund under IRC Section 6411 by filing Form 1139, Corporation Application for Tentative Refund. The IRS will process your application within 90 days and form 1139 must be filed within 12-months of the last day of the taxable year from which the NOL arises. Since the deadline to file form 1139 for 2018 has already passed, the IRS has offered a 6-month extension for any tax year beginning in 2018 and ending before June 30, 2019. This will allow businesses the opportunity to evaluate their circumstances and determine the best way to move forward. The IRS will likely update the Form 1139 to include 5 years instead of 2. The IRS will also allow the form to be submitted by fax to help expediate the process.
EY. 2020. Tax News Update. March 31. Accessed April 20, 2020.
PWC. 2020. Using Tentative Refund Procedures to Access Cash fom Estimated Tax Overpayment, New NOL Carryback. April 3, 2020. Accessed April 20, 2020.
IRS. 2020. Notice 2020-26. Accessed 2020.