The IRS Provides Guidance Regarding Key Procedures For NOL Refund Claims and Certain NOL Elections under the CARES Act

The Internal Revenue Service (“IRS”) issued Notice 2020-26 and Revenue Procedure 2020-24 to provide guidance regarding certain net operating loss (“NOL”) provisions in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  Notice 2020-26 allows an extension of time for taxpayers to apply for an expedited tax refund for certain NOLs and Rev. Proc. 2020-24 provides additional guidance regarding certain elections and refund requests for NOLs governed by the CARES Act (and certain pre-TCJA NOLs).

Notice 2020-26

Notice 2020-26 provides an extension of time for taxpayers to file an expedited tax refund application for an NOL that arose in a tax year that began during 2018 and ended on or before June 30, 2019.  The Notice corrects a technical issue to allow a taxpayer to obtain a quick refund for all NOLs that are eligible for carrybacks under the CARES Act.

In 2017, the Tax Cuts & Jobs Act (the “TCJA”) modified the NOL rules significantly to provide that an NOL arising in a taxable year beginning after December 31, 2017 could be carried forward indefinitely to offset 80% of taxable income for a given tax year but could not be carried back to any prior tax year.  The CARES Act temporarily restores pre-TCJA law to allow NOLs to fully offset taxable income in any tax year beginning before January 1, 2021.  In addition, the CARES Act provides that an NOL arising in any tax year beginning in 2018, 2019 or 2020 can generally be carried back to any of the five tax years preceding the tax year of the loss that gave rise to the NOL.  As a result, taxpayers may take such NOLs into account in the earliest taxable year in the carryback period and with the unused amounts carried to each succeeding taxable year within the carryback period.  For the implications of net operating losses (and other CARES Act tax benefits) for M&A transactions, see our Client Alert on this topic.

To claim a tax refund attributable to an NOL carryback, a taxpayer may amend its tax return for the applicable year or can apply for an expedited tax refund.  A taxpayer uses IRS Form 1139 (corporations) or IRS Form 1045 (taxpayers other than corporations) to file an expedited tax refund application.  Filing Form 1045 or Form 1139 entitles the taxpayer to a 90-day refund process, which is much faster than the available relief if the taxpayer were to amend its tax return for the applicable year.  An expedited tax refund application is typically due within twelve months after the end of the tax year in which the NOL arose.

Although the CARES Act allows taxpayers to carryback NOLs arising in 2018 – 2020, it does not extend the time period for filing a Form 1045 or Form 1139 for such tax years for which the filing deadline has expired.  Thus, without additional guidance, a taxpayer with an NOL that arose in a tax year ending on December 31, 2018 would have had until December 31, 2019 to file a Form 1045 or 1139 with respect to that NOL claim.  Because this due date has passed, before Notice 2020-26, the taxpayer would not have been eligible to use the 90-day expedited refund process. 

Notice 2020-26 helpfully provides an extension of time to file Form 1045 or Form 1139 for an NOL arising in a tax year beginning in 2018 and ending before June 30, 2019.  The taxpayer must file the applicable Form no later than 18 months after the close of the year in which the NOL arose.  This is effectively a six-month extension of the time to file.  Without this Notice, the taxpayer would have been required to file the applicable Form no later than 12 months after the close of the year in which the NOL arose. For example, a calendar-year taxpayer that has a 2018 NOL will have until June 30, 2020 to file an expedited tax refund application (Form 1045 or Form 1139) with respect to that NOL (rather than December 31, 2019). 

The Notice also clarifies a timing issue with respect to a corporate taxpayer that wishes to file an expedited refund application for both an NOL and any remaining alternative minimum tax (“AMT”) credits for its 2018 tax year.  The CARES Act permits a corporate taxpayer to apply for a tentative refund of AMT credits for its 2018 tax year if the refund application is filed by December 30, 2020.  The Notice clarifies that if a corporate taxpayer prefers to file one tentative refund application to claim both the NOL carryback and the AMT credit, it must apply the shorter of the two deadlines and file the application by June 30, 2020 (rather than December 30^th).

To take advantage of the extended deadlines for expedited tax refunds provided in Notice 2020-26, a taxpayer must file Form 1045 or Form 1139 no later than 18 months after the close of the year in which the NOL arose and include on the top of the Form: “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”   Our Client Alert regarding amended partnership tax returns discusses issues relating to partners in partnerships who would like to file a Form 1045 or Form 1139.

Revenue Procedure 2020-24

Rev. Proc. 2020-24 provides guidance regarding certain elections and refund requests for NOLs governed by the CARES Act (and certain pre-TCJA NOLs).  The Revenue Procedure provides important guidance regarding the deadlines and procedures for making such elections and requests. 

• Election to waive carryback of 2018 or 2019 NOLs. A taxpayer may elect to waive the entire carryback period with respect to NOLs arising in a taxable year beginning in 2018 or 2019, even though carryback is permitted under the CARES Act.  The taxpayer must make the election no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the first taxable period ending after March 27, 2020.  Any such election is irrevocable once made.  To make this election, the taxpayer must attach a separate statement to the applicable tax return stating that the taxpayer elects to apply Section 172(b)(3) of the Internal Revenue Code under Rev. Proc. 2020-24 for the applicable tax year.
• Election to exclude Section 965 years from NOL carryback period. If a taxpayer included an amount in income under Section 965(a) of the Internal Revenue Code (e., the repatriation of foreign earnings toll charge) in a prior year (or years) (a “Section 965 year”), the taxpayer may elect to exclude those years from the NOL carryback period with respect to a 2018, 2019, or 2020 NOL.  This election may be desirable to avoid complexities when an NOL is carried to a Section 965 year.  The taxpayer can avoid these complications and still use the NOL to offset income in other tax years in the carryback period.  For a 2018 or 2019 NOL, the taxpayer must make the election no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the first taxable period ending after March 27, 2020.  For a 2020 NOL, the taxpayer must make the election by the due date of the taxpayer’s 2020 federal income tax return. 

To make this election, the taxpayer must attach an election statement to one of the following (whichever is filed earliest): its federal income tax return for the year when the NOL arose, its expedited refund claim for the NOL, or its amended federal income tax return applying the NOL to the earliest year that is not a Section 965 year.  The election statement must state that the taxpayer elects to apply Section 172(b)(1)(D)(v)(I) of the Internal Revenue Code under Rev. Proc. 2020-24 and indicate the tax year in which the NOL arose and the taxpayer’s Section 965 years.

If this election is not made and an NOL is carried back to a Section 965 year, the taxpayer is deemed to make a non-waivable election under Section 965(n) of the Internal Revenue Code to not apply the NOL against the Section 965(a) income inclusion.  However, if the taxpayer did not previously make the Section 965(n) election for a tax year, or has revoked its Section 965(n) election, the deemed election will only apply to the NOL carryback to such Section 965 year.  Rev. Proc. 2020-24 should therefore not alter any NOLs that were previously used against a Section 965(a) inclusion.

• Expedited relief for 2017 NOLs. The CARES Act provides a technical correction to the TCJA to provide that NOLs arising in a tax year that began in 2017 (even if it ends in 2018) may be carried back two years under pre-TCJA law.  A taxpayer may request an expedited refund due to such NOL (or may elect to waive the carryback, reduce the carryback period, or revoke an election to waive the carryback of the NOL) if it files an IRS Form 1139 (corporate taxpayers) or IRS Form 1045 (taxpayers other than corporations) on or before July 27, 2020.  A taxpayer may also request refunds or make such elections on an amended federal income tax return, but the relief will not be expedited.  To take advantage of this relief, the taxpayer must attach a statement with “Filed pursuant to Rev. Proc. 2020-24” at the top to its amended tax return, Form 1045 or Form 1139 with certain information about the taxpayer and the applicable request or election.

Please reach out to us with any questions about the CARES Act and its implications for NOLs.