IRS Guidance on NOL Carrybacks and Related Compliance Issues
Authored by Clare Smith, Senior Tax Consultant
On April 9, 2020, the IRS released guidance in Notice 2020-26 for taxpayers seeking to claim a refund for net operating loss (NOL) carrybacks under the new rules provided for in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The IRS also issued Rev. Proc. 2020-24 to provide guidance about various NOL carryback elections, Notice 2020-23 to provide extensions for additional tax deadlines, including the second quarter (Q2) estimated payment deadline, and a set of Frequently Asked Questions (FAQs) about claiming refunds for NOL carrybacks and AMT credits.
- Taxpayers may file Form 1139 (for corporations) or Form 1145 (for all other taxpayers) to claim a refund for 2018 NOL carrybacks by June 30, 2020.
- Elections must be made by the due date for 2020 federal income tax returns in order to waive a § 965 transition tax year from the carryback period or to waive all carrybacks.
- Fiscal-year filers with tax years beginning in 2017 but ending in 2018 may use Form 1139 or Form 1145 to claim a refund for NOL carrybacks by June 27, 2020.
- Q2 estimated payments are now due July 15, 2020 for calendar-year taxpayers.
As amended by the CARES Act, IRC § 172(b)(1)(D)(i) provides that NOLs generated in tax years beginning after December 31, 2017 and ending before January 1, 2021 (calendar years 2018 – 2020) may be carried back to the preceding five tax years. In order to facilitate taxpayers claiming a refund for NOLs generated in 2018, and for fiscal tax years that ended on or before June 30, 2019, the IRS has provided a 6-month extension of the deadline for filing an application for a tentative carryback adjustment provided for in IRC § 6411. Claims for tentative refunds for certain adjustments, including NOL carrybacks, are made by filing either Form 1139 or Form 1045 and are typically due within 12 months of the close of the applicable tax year. The IRS has extended that period to 18 months for all tax years ending prior to June 30, 2019, in order to allow taxpayers to file a claim for a tentative refund for NOLs generated in the 2018 tax year. When filing the applicable form, the taxpayer should include at the top “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”
Corporate taxpayers who want to claim both the NOL carryback and the alternative minimum tax (AMT) credit on one application should also consider that they need to file by the June 30th deadline, despite the fact that the CARES Act extended the time to file a claim for a tentative refund of AMT credits to December 31, 2020.
Rev. Proc. 2020-24 addresses the time and manner for making an election to waive NOL carrybacks to years in which § 965 applies (§ 965 years) and the election to waive carrybacks for NOLs generated in 2018 or 2019.
In order to exclude § 965 years from the carryback period, the taxpayer must make the election by the due date (including extensions) of the first taxable year ending after March 27, 2020.
For example, the deadline for a calendar-year corporate taxpayer to make this election for an NOL generated in 2018 is October 15, 2021 (assuming they apply for a 6-month extension). However, the election statement must be included with the earliest of (i) the federal income tax return for the year in which the NOL arises (if first filed after April 9, 2020), (ii) the Form 1139 or Form 1045 application for a tentative refund applying an NOL to a taxable year in the carryback period, or (iii) the amended return applying the NOL to the earliest taxable year in the carryback period that is not a § 965 year. As a result, if for example, a calendar-year taxpayer files a Form 1139 to claim a refund for carrying back a 2018 NOL (which is due June 30, 2020), they must attach the election to exclude the § 965 year to the Form 1139.
In order to waive all carrybacks for NOLs generated in 2018 or 2019, the taxpayer must make the election by the due date (including extensions) of the first taxable year ending after March 27, 2020. They must attach a separate election statement for NOLs generated in 2018 and 2019.
Rev. Proc. 2020-24 also clarifies that for carrying back NOLs arising in fiscal tax years beginning before January 1, 2018 and ending after December 31, 2017, taxpayers may file Form 1139 or Form 1145 by June 27, 2020 to claim a refund and will be treated as having timely filed. A taxpayer may make an election to waive, reduce, or revoke an earlier waiver for that period by filing an amended return or Form 1139/1145 (blank except for identification information) with an election statement including “Filed Pursuant to Rev. Proc. 2020-24” written at the top.
Today, the IRS released a set of FAQs establishing a new process for taxpayers claiming refunds for NOL carrybacks and AMT credits. To ensure taxpayers are able to receive their refunds in an expedited manner, for refunds for these two CARES Act provisions only, they will accept Forms 1139 and 1145 via fax starting April 17, 2020. The fax number for Form 1139 is 844-249-6236 and for Form 1145 is 844-249-6237. Additionally, they will allow taxpayers to use these forms to claim a refund in § 965 years if the related tax liability is fully paid. Forms will be processed in the order received and faxes are limited to 100 pages.
Finally, in Notice 2020-23, the IRS provided additional extensions for filing and payment deadlines due after April 1, 2020 and before July 15, 2020. Most notably, they extended the estimated payment deadline for Q2 2020 and the deadline to claim a refund for the 2016 tax year to July 15, 2020.
TPC will continue to monitor for further developments, and will provide additional information as it becomes available. Please contact a member of your TPC engagement team if you have any questions about this topic or to learn more about how TPC can help.