Amended return opportunities: Net operating losses (NOLs)

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, 3/17/2020) removes the Tax Cuts and Jobs Act (TCJA, 12/22/2017)'s harsh treatment of NOLs, which creates great opportunity to offset taxes paid in previous years to harness tax refunds for businesses that find themselves in a loss situation.

For NOL years beginning before 2021, the CARES Act removes the limitation on deductions for prior year NOLs carried over into tax years before 2021, where an 80%-of-taxable-income limitation existed under the TCJA. Consequently, NOLs generated in post-2017 tax years can be carried over to fully offset taxable income in 2018-2020. (Code Sec. 172, as amended by the CARES Act)

For NOLs beginning after 2020, the CARES Act allows NOL deductions equal to the sum of: (1) 100% of NOL carryovers from pre-2018 tax years, plus (2) The lesser of: (a) 100% of NOL carryovers from post-2017 tax years; or (b) 80% of remaining taxable income (if any) after deducting NOL carryovers from pre-2018 tax years. (Code Sec. 172, as amended by the CARES Act) 

For NOLs arising in 2018-2020, the CARES Act allows NOLs to be carried back for five years (Code Sec. 172, as amended by the CARES Act) 

For example, if a client has an NOL generated in 2020 due to the COVID-19 crisis, that NOL can be carried back to 2015 and offset against taxable income to generate tax refunds. Because tax rates were generally higher prior to the TCJA, a significant opportunity exists in carrying a post-TCJA loss back to higher taxed years.  

Rev Proc 2020-24 also explains how businesses with a Code Sec. 965(a) income inclusion in 2018, 2019, or 2020 can elect to exclude that year from the NOL carryback period. This is referred to as a Code Sec. 965(n) election. Clients can make the election under Code Sec. 172(b)(1)(D)(v)(I) to exclude all Code Sec. 965 years from the carryback period. This means taxpayers will generally only be able to use the NOL carryback to offset other-than-section 965 income, which is great news because this allows taxpayers to continue to apply foreign tax credits against foreign source income. 

Deadline for filing an amended return or a tentative quick refund claim

Generally, an amended return to claim a credit or refund must be filed within three years of the date the original return was filed or two years from the time the tax was paid (whichever is later). (Code Sec. 6511(a) and Code Sec. 6513(a))

So, one way a taxpayer can file a claim for refund, based on an NOL adjustment, is by filing an amended return within the statute deadlines. However, a taxpayer can also recover a tax refund by filing a tentative quick refund, under Code Sec. 6411(a), using either Form 1139 (corporate) or Form 1045 (individuals, trusts, and estates).

The IRS advises taxpayers to disregard form instructions barring use of the forms for Code Sec. 965(n) election purposes. (Code Sec. 53(e)(5) as added by the CARES Act)

Also, under temporary procedures during COVID-19 office closures, taxpayers may fax Form 1139 and Form 1045 to the IRS at 844-249-6236 (corporations) and 844-249-6237 (individuals, trusts, and estates).

Normally, a taxpayer must file a tentative quick refund claim within one year after the end of the year in which the NOL arose. The IRS provided a 6-month extension of time to file Form 1139 or 1045, for NOLs that arose in calendar year 2018 and for tax years that ended on or before June 30, 2019, but that extension expired on June 30, 2020. (Notice 2020-26)

Fortunately, taxpayers can still file a claim for refund of taxes by filing an amended return on Form 1120X, (Form 1040X for individuals), within three years after the due date of the return including extensions, for the NOL year. (Code Sec. 6511(d)(2))

Also, taxpayers may waive (relinquish) the NOL carryback privilege and, instead, carry losses forward to future tax years. Under Rev Proc 2020-24, taxpayers may elect to waive the carryback period for NOLs arising in tax years 2018 or 2019.

For additional tax tips and guidance, explore Thomson Reuters resources such as Federal Tax Handbook 2021, Federal Tax Regulations, Winter 2021, and the Complete Internal Revenue Code, Winter 2021.