IRS Explains How Taxpayers Can Claim the Five-Year NOL Carryback Under the CARES Act
Taxpayers may now use a five-year carryback for net operating losses (NOLs) arising in tax years beginning in 2018, 2019, and 2020, compliments of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136).
In response, new IRS guidance:
- Extends the deadline for filing tentative refund claims for NOLs arising in 2018 tax years
- Allows late elections for waiving the carryback period for NOLs arising in 2018 tax years
- Expedites refund claims that are FAXED
- Provides guidance for fiscal-year taxpayers with a 2017/2018 NOL year
Deadline extended for filing refund claims for 2018 NOLs
To claim a refund of taxes for an NOL carryback, taxpayers file a single tentative refund claim that covers all carryback years, or an amended return for each carryback year. Individuals file a tentative refund claim on Form 1045, Application for Tentative Refund. Corporations use Form 1139, Corporation Application for Tentative Refund.
Many taxpayers prefer Form 1045 or Form 1139 because the law requires the IRS to process the refund request within 90 days. In addition, these forms eliminate the burden of filing multiple amended returns to account for each carryback year if the NOL is not fully absorbed in the first carryback year.
Filing deadlines for Forms 1045 and 1139
An application for tentative refund is generally due no later than the last day of the tax year following the tax year in which the NOL arose. By the time the CARES Act was enacted on March 27, 2020, this deadline had expired for:
- the 2018 tax year in the case of calendar year taxpayers, and
- tax years that ended before March 27, 2019, for fiscal-year taxpayers,.
The IRS, however, responded by extending the deadline for six months for NOLs that arose in a tax year that began during 2018 and ended on or before June 30, 2019. This means calendar year taxpayers only have until June 30, 2020 to file a tentative refund claim for the 2018 tax year. A taxpayer taking advantage of the six-month extension should write “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment” on the top of their Form 1045 or Form 1139.
FAX your Form 1045 or 1139
In separate guidance issued as an FAQ, the IRS requests, but does not require, taxpayers to FAX tentative refund applications filed after April 16, 2020. The IRS may not be able to process mailed applications within the statutorily prescribed 90-day period because many IRS personnel are now working at home, and processing centers are closed and/or understaffed. However, the IRS is attempting to process FAXED refund requests within the 90-day period.
Individuals should fax Form 1045 to 844-249-6237, and corporations should fax Form 1139 to 844-249-6236. Taxpayer who mailed their refund applications after March 27, 2020 and before April 17, 2020 may also FAX them.
However, amended returns should not be FAXED along with the refund claim. The IRS cannot process a FAXED refund claim for taxes shown on an amended return for a carryback year until the amended return is first processed.
The IRS will process FAXED refund claims in the order they are received. These procedures remain in effect until further notice.
Late waivers of 2018 and 2019 NOL carryback period
A taxpayer generally must file an election to waive an NOL carryback period by the due date, including extensions, of the income tax return for the year in which the NOL arose (Code Sec. 172(b)(3)). However, the IRS allows taxpayers to file late waivers for NOLs arising in tax years beginning in 2018 or 2019. The election must be made by the due date, including extensions, for filing the income tax return for the first tax year ending after March 27, 2020.
Special rules for fiscal year 2017/2018 NOLs
The CARES Act includes a technical correction clarifying that the elimination of the carryback period originally enacted by the Tax Cuts and Jobs Act applies to NOLs arising in tax years beginning after 2017 and not to tax years ending after 2017.
As a result of this change, taxpayers with an NOL that arose in the 2017/2018 fiscal year may now carry back these losses under the rules that applied before the Tax Cuts and Jobs Act. The carryback period for these NOLs is generally two years.
The CARES Act also includes a specific provision extending the deadline for filing refund applications for the 2017/2018 NOL year on Form 1045 or Form 1139. Taxpayers with a 2017/2018 NOL may file their tentative refund claim no later than July 27, 2020. Waivers of the carryback period must also be filed on an amended return or a Form 1045 or Form 1139 no later than July 27, 2020.
Other NOL items of note
In addition to the five-year carryback period and clarification of the carryback rules for 2017/2018 NOLs, the CARES Act:
- Delays, until tax years beginning after 2020, a rule in the Tax Cuts Act that allows an NOL arising in a tax year beginning after 2017 to only offset 80% of taxable income in a carryback or carryforward year
- Clarifies that 80% of taxable income is computed by reducing taxable income by pre-2018 NOLs and the deductions claimed under IRC §199A for qualified business income from a pass-through entity or sole proprietorship and IRC §250 for foreign-derived intangible income for global intangible low-taxed income
- Delays until tax years beginning after 2020, IRC §461(l), which treats excess business loss deductions of individuals as an NOL carryover
- Allows taxpayers to elect to exclude from the five-year carryback period any carryback year in which a repatriation tax is imposed under IRC §965
The five-year carryback will give a welcomed injection of liquidity to many businesses strained by the adverse impact of the COVID pandemic. The relief, however, is only temporary. NOLs arising in tax years beginning after 2020 do not have a carryback period, with the exception of a two-year carryback for farming losses. An unlimited carryforward period continues to apply to all post-2017 NOLs.
By Ray G. Suelzer, J.D., LL.M.
Wolters Kluwer is by your side to help you stay up-to-date with tax and compliance changes and support your ability to work remotely. Please visit our Coronavirus (COVID-19) Resource Page for Tax & Accounting Professionals.