Thanks to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, business owners who experienced net operating losses (NOLs) in recent years have new flexibility to apply those losses to offset taxable income. The IRS issued a series of revenue procedures and other guidance to help taxpayers take advantage of the relaxed NOL rules.
The Tax Cuts and Jobs Act (TCJA) of 2017 imposed restrictions on taxpayers’ ability to use NOLs. Starting with tax years ending after December 31, 2017, these restrictions precluded most taxpayers from carrying NOLs back to prior years and required them to carry the losses forward. The TCJA further restricted the taxpayer’s ability to utilize their post-December 31, 2017, NOLs by limiting the NOL deduction to 80% of the taxpayer’s taxable income in the year the loss was carried to.
The CARES Act overrides these two restrictions. It allows a five-year carryback period for losses arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021, unless the taxpayer elects to waive or reduce the carryback. The 80% limitation has been suspended for the same period and taxpayers can now offset 100% of their taxable income with these NOLs.
The CARES Act also eliminates the limitation on excess business losses for taxpayers (other than corporations) for tax years beginning after December 31, 2017, and before January 1, 2021. This guidance offers relief to certain taxpayers that would have been subject to this limitation and may increase NOLs that are eligible for the five-year carryback.
Procedures for NOL Elections
In Revenue Procedure 2020-24 (PDF), the IRS provides procedures for when and how to file the following elections:
- Election to waive NOL carryback. – The default is for NOLs to be carried back first and then excess losses carried forward. The revenue procedure provides guidance regarding the election to waive the carryback period for an NOL arising in a taxable year beginning in 2018 or 2019. The election is made by attaching the election statement to the taxpayer’s timely filed tax return for the first taxable year ending after March 27, 2020. A separate election statement must be attached for each year (2018 or 2019) the election is intended for.
- Election to exclude Section 965 years. Taxpayers that had income inclusion under Section 965 may elect to exclude all Section 965 years in the carry back period. For tax years beginning in 2018 and 2019 the election is made by attaching the election statement to the taxpayer’s timely filed tax return for the first taxable year ending after March 27, 2020.
- Elections under the CARES Act special rule concerning taxable years that begin in 2017 and end in 2018. The revenue procedure provides guidance regarding elections under the special rule set forth in the CARES Act to waive any carryback period, to reduce any carryback period, or to revoke any election to waive any carryback period for a taxable year that began before Jan. 1, 2018, and ended after Dec. 31, 2017.
In Notice 2020-26 (PDF), the IRS grants a six-month extension of time to file Form 1045 (PDF), Application for Tentative Refund, or Form 1139 (PDF), Corporation Application for Tentative Refund, as applicable, with respect to the carryback of an NOL that arose in any taxable year that began during calendar year 2018 and that ended on or before June 30, 2019. Taxpayers typically have until 12 months from their year-end to file these forms. For example, a 2018 calendar year taxpayer must typically file Form 1045 or Form 1139 by December 31, 2019. Under this relief they would have until June 30, 2020, to file their refund claim using these forms.
Temporary Procedures to Fax Certain Forms Due to COVID-19
The IRS set up temporary procedures to process eligible refund claims as quickly as possible while normal operations are closed due to the pandemic. Beginning April 17, 2020, and until further notice, the IRS will accept by fax refund claims made on Form 1139 or Form 1045 that are allowed under Sections 2303 and 2305 of the CARES Act. Eligible taxpayers can fax:
The IRS encourages taxpayers to fax rather than mail their Forms 1139 and 1045, since mail processing is being impacted by the emergency. Important note: These fax numbers are not for general use. Taxpayers should use these numbers only for Forms 1139 and 1045 (and accompanying materials). Other submissions will not be processed.
A maximum of 100 pages can be initially faxed to either of the numbers listed above. If additional documentation is required to be attached or deemed necessary, taxpayers will be notified during the processing of the forms.
Normally, these forms must be filed via hard copy delivered by the USPS or a private delivery service. Taxpayers who mailed a hard copy of a refund-eligible claim after March 27, 2020, can now submit that same claim to the fax numbers stated above.
For more details, see the IRS’ Q&A section regarding temporary faxing procedures on the IRS website.