The big tax bill passed at Christmas 2017 was called the Tax Cuts and Jobs Act, and it slashed the ability to claim NOLs after 2017 to 80% of taxable income. What’s more, the 2017 law took away your ability to carry NOLs back to prior tax years. Both of those changes hurt, especially the rule killing carrybacks. But as part of the COVID-19 response, the new CARES Act helps in a big way. For tax years starting after December 31, 2017 and before January 1, 2021—that’s 3 calendar years of losses that you incurred in 2018, 2019, or 2020—the new law allows you to carryback 100% of these NOLs to the prior five tax years. Losses that are carried back are carried to the earliest of the tax years to which the loss may be carried first. You have to work out the mechanics of claiming these, but it’s a sweet deal if you are in the sour position of having losses. With COVID-19, there will be lots of business with losses for 2020.
Tax refund check from US Treasury and US currency 100 dollar bills. Treasury check could be for tax … [+]
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How about NOL carryforwards? The CARES Act liberalizes the treatment those too, at least for time. If you want, you can waive the carryback, and can elect to carry NOLs forward to subsequent tax years. Run some numbers to see if this makes any sense. Furthermore, for 2018, 2019 and 2020, corporate taxpayers can use NOLs to fully offset their taxable income, rather than only 80% of taxable income. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the present 80% limit).
What happens in 2021? For tax years beginning after 2021, taxpayers will be eligible for: (1) a 100% deduction of NOLs arising in tax years before 2018, and (2) a deduction limited to 80% of taxable income for NOLs arising in tax years after 2017. Under the changes of the CARES Act, corporate taxpayers with eligible NOLs may now be able to claim a refund for tax returns from prior tax years. For corporate taxpayers, NOLs carried back to pre-2018 years—when corporate tax rates were a whopping 35%—are more valuable than losses used to offset income taxable at the current 21% rate. Thus, a corporation can carry back its 2018, 2019, and 2020 NOLs to offset pre-2018 ordinary income or capital gains that were taxed at rates of up to 35%. Think of it as a kind of tax-rate arbitrage, so you can get a tax refund based on the old higher tax rate.
The IRS has already announced implementing rules for these important changes. Revenue Procedure 2020-24 provides guidance to taxpayers with net operating losses that are carried back under the CARES Act. There are details about
- waiving the carryback period in the case of a net operating loss arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021,
- disregarding certain amounts of foreign income subject to transition tax that would normally have been included as income during the five-year carryback period, and
- waiving a carryback period, reducing a carryback period, or revoking an election to waive a carryback period for a taxable year that began before Jan. 1, 2018, and ended after Dec. 31, 2017.
What’s more, the IRS is also giving you more time to file, giving you an extra six months. In Notice 2020-26, the IRS grants a six-month extension of time to file IRS Form 1045 or Form 1139 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. Individuals, trusts, and estates should file Form 1045. Corporations should file Form 1139.
Are partnerships with losses left out? Not hardly. The IRS issued Revenue Procedure 2020-23, which allows eligible partnerships to file amended partnership returns using a Form 1065. They are supposed to check the “Amended Return” box and issue amended Schedules K-1 to the partners. Partnerships filing these amended returns should write “FILED PURSUANT TO REV PROC 2020-23” at the top of the amended return.