IRS Issues Guidance on NOL Carrybacks Under the CARES Act

As noted in our prior alert “Tax Related Provisions of the CARES Act,” the CARES Act (the act) temporarily reinstates the ability of certain taxpayers to carry back net operating losses (NOLs) to prior taxable years,^[1] which ability had previously been proscribed by the Tax Cuts and Job Act (TCJA) for NOLs generated in taxable years ending after Dec. 31, 2017.^[2] The act amends code Section 172 to permit NOLs generated in taxable years beginning in 2018, 2019 and 2020 to be carried back five years from the taxable year of the loss. Consistent with pre-TCJA law, taxpayers generally must take into account such NOLs in the earliest taxable year of the carryback period first and carry forward any unused amounts to each subsequent taxable year, but they may waive carrybacks for 2018, 2019 and 2020 NOLs.^[3] The act also allows taxpayers to elect to exclude years in which the taxpayer recognizes income inclusions (at reduced rates) under code Section 965 (relating to mandatory repatriation under the TCJA) (each such inclusion year is a “Section 965 year”) from the carryback of NOLs. In addition, the act permits fiscal-year taxpayers to apply for a tentative two-year carryback adjustment under code Section 6411(a) with respect to an NOL arising in a taxable year that begins before Jan. 1, 2018, and ends after Dec. 31, 2017 — such an NOL is a “straddle NOL” — and provides certain elections that may be made by taxpayers with respect to such straddle NOLs.^[4]

On April 9, the Internal Revenue Service (IRS or the service) issued Revenue Procedure 2020-24 to provide guidance to taxpayers (including consolidated groups) regarding the available elections relating to the NOL carryback provisions of the act and the making of Section 6411(a) applications with respect to straddle NOLs.^[5]  

Blanket Carryback Waiver. Revenue Procedure 2020-24 provides that a taxpayer generally may waive the carryback period for NOLs arising in taxable years beginning in 2018 and/or 2019 by making an irrevocable election no later than the due date (taking into account extensions) for filing its federal income tax return for its first taxable year ending after March 27. The taxpayer must make such election by attaching a separate statement to such tax return for each year (2018 and/or 2019) it intends to make the election.^[6] The statement must indicate that the taxpayer is making an election to apply code Section 172(b)(3) under Revenue Procedure 2020-24 and specify the taxable year for which the statement applies.

Election to Exclude Section 965 Years From Carryback. In lieu of the blanket carryback waiver described above, a taxpayer may irrevocably elect under code Section 172(b) to exclude all of its Section 965 years (no cherry-picking) from the carryback period for NOLs arising in taxable years beginning in 2018, 2019 or 2020. Such election effectively preserves a taxpayer’s ability to utilize such NOLs to offset taxable income in other years (whether in the carryback period or on a going-forward basis) taxed at higher regular rates. As with the blanket carryback waiver, such an election for 2018 or 2019 NOLs must be made no later than the due date (taking into account extensions) for the taxpayer’s federal income tax return for its first taxable year ending after March 27. For an NOL arising in a taxable year beginning in 2020, such an election must be made no later than the due date (taking into account extensions) for the taxpayer’s federal tax return for such taxable year. Election statements must be attached to a taxpayer’s income tax return or claim for tentative carryback adjustment as set forth in Revenue Procedure 2020-24, and must indicate that the taxpayer is making an election to apply code Section 172(b)(1)(D)(v)(l) under such revenue procedure, the taxable year in which the NOL arose and the taxpayer’s Section 965 years.^[7]

Section 6411(a) Applications and Elections for Straddle NOLs. Taxpayers may make an application under code Section 6411(a) for a tentative carryback adjustment with respect to the carryback of a straddle NOL by filing an application on either IRS Form 1045, Application for Tentative Refund, or IRS Form 1139, Corporation Application for Tentative Refund, no later than July 27. Likewise, elections for a taxable year with a straddle NOL to waive or reduce a carryback period, or elections to revoke any such prior elections, must be filed no later than July 27. Revenue Procedure 2020-24 sets forth the requisite procedures for taxpayers to follow to make any such elections.

If you have any questions about the issues addressed in this alert or would like copies of any of the materials mentioned, please contact any of the authors.

^{[1] The act also temporarily relaxes taxable income limitations on a taxpayer’s use of NOLs by amending Section 172 of the Internal Revenue Code of 1986, as amended (the code), to permit all NOLs carried forward or back to taxable years beginning before Jan. 1, 2021, to offset 100 percent of a taxpayer’s taxable income for such years in lieu of the 80 percent taxable income offset limitation that had been imposed by the 2017 TCJA with respect to NOLs arising in taxable years beginning after Dec. 31, 2017.}

^{[2] For taxable years beginning after Dec. 31, the limitations on NOL carrybacks (and offsets to taxable income) imposed by the TCJA generally snap back into effect.}

^{[3] See code sections 172(b)(2) and (3).} 

^{[4] The act provides a welcome amendment to the TCJA for fiscal-year taxpayers with straddle NOLs. Following the enactment of the TCJA, taxpayers with a tax year that included — but did not end — on Dec. 31, 2017, could not carry back NOLs arising in such year because the TCJA legislation that generally eliminated NOL carrybacks was made applicable to losses in taxable years ending after Dec. 31, 2017. Straddle NOLs are now subject to the same carryback/carryforward rules as existed prior to enactment of the TCJA.}

^{[5] The service also issued Notice 2020-26 on April 9. Such notice extends the deadline for filing an application for an expedited tentative carryback adjustment under code Section 6411 with respect to the carryback of an NOL that arose in any taxable year that began during calendar year 2018 and ended on or before June 30, 2019.}

^{[6] Presumably, any such election with respect to an NOL for a taxable year beginning in 2020 would be made no later than the due date (taking into account extensions) for filing the taxpayer’s federal income tax return for such taxable year.}

^{[7] If a taxpayer does not make an election to exclude Section 965 years from the five-year NOL carryback period for 2018, 2019 or 2020 NOLs, with the result that any such NOL is carried back to a Section 965 year, the election under code Section 965(n) is automatically deemed to apply for such year. Code Section 965(n) as enacted by the TCJA in general allows a taxpayer to elect for a taxable year not to take into account Section 965 inclusions in determining the taxpayer’s NOL deduction for the taxable year or taxable income for the taxable year that may be reduced by NOL carryovers or carrybacks. In effect, a taxpayer will be able to offset nonmandatory repatriation income only with an NOL carried back to a Section 965 year, which could result in residual income recognition if a taxpayer does not otherwise have sufficient foreign tax credits to offset the mandatory income inclusion for such year.}