Tax Alert: IRS Issues Additional Guidance on Tentative Carryback Adjustments for Net Operating Losses (NOL) Under the CARES Act
On April 9, the IRS issued additional guidance related to carrying back net operating losses (NOL) under the CARES Act. The CARES Act temporarily allows taxpayers to carry back NOL’s arising after Dec. 31, 2017 and before Jan. 1, 2021. IRS Rev. Proc. 2020-24 and IRS Notice 2020-26 provide guidance to taxpayers on how to take advantage of these changes and timelines to be considered.
With this updated guidance, taxpayers would be encouraged to work with their tax professionals.
Companies May Carry Back NOL’s to Previous Tax Years
Rev. Proc. 2020-24 provides that a taxpayer may carry back an NOL that may have arisen after Dec. 31, 2017 and before Jan. 1, 2021, to each of the five preceding taxable years after the NOL arose (i.e. incurred an NOL in 2019 and such NOL can be carried back up to five years). Under the Revenue Procedure, a taxpayer may also make an irrevocable election to waive the carryback period and instead carry the NOL forward into future tax years. This is important, as taxpayers may now look to fully use incurred NOL’s against income in previous years instead of being subject to the limitations provided under the Tax Cuts & Jobs Act (TCJA).
Extension to Make a Carry Back Application
Normally, a taxpayer must file an application for a tentative carryback adjustment within 12 months of the close of the taxable year in which the NOL arose. However, the IRS is granting a six-month extension to file an application for a refund. For corporate taxpayers, an application for a tentative carryback adjustment should be made using IRS Form 1139, Corporation Application for Tentative Refund. For noncorporate taxpayers (i.e. partnerships, LLCs, etc.), an application for a tentative carryback adjustment can be made using IRS Form 1045, Application for Tentative Refund. Upon receipt of an application, the IRS will only conduct a limited examination of the application and provide a credit or refund within 90-days after the receipt of the application.
Carry Back Refund Process
IRS guidance provides that in order to take advantage of the extension of time for requesting a tentative refund based on an NOL carryback, a taxpayer must complete the following steps:
(a) File an application no later than 18 months after the close of the taxable year in which the NOL arose (that is, no later than June 30, 2020, for a taxable year ending Dec. 31, 2018); and
(b) Include on the top of the application “Filed Pursuant to Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”
If you have any questions about Rev.Proc. 2020-24 or other beneficial tax provisions in the CARES Act, please contact KJK Tax Chair Kevin T. O’Connor at firstname.lastname@example.org or 216. 736.7213, Demetrius Robinson at email@example.com or 614.427.5749, or one of our Tax Professionals.