Recently, the IRS has issued guidance providing tax relief under the CARES Act for taxpayers filing a net operating loss (NOL) carryback claim. Notice 2020-26 grants a six-month extension to file such a claim for taxable years arising during calendar year 2018 and ending on or before June 30, 2019. Calendar year 2018 taxpayers now have until June 30, 2020 to file either Form 1139 (corporations) or Form 1045 (individuals), as applicable. Otherwise, taxpayers can file an amended return for the year to which the NOL is carried back. Again, such an amended return must be filed within three years of the earlier of the extended due date or date of filing for the year the NOL was incurred.
However, some companies may find themselves questioning the appropriate course of action if they have incurred a NOL in a year earlier than 2018 and the carryback period for that NOL is still available. The answer highlights a timely claim that some companies may need to file before June 30, 2020.
For tax years prior to 2018, taxpayers may carry back an NOL for two tax years and then carry it forward for 20 tax years unless the taxpayer waived the carryback period. Taxpayers may elect to relinquish the carryback period and carry forward the entire amount of a NOL from a particular tax year. The election is made by attaching a statement to the taxpayer's timely filed (including extensions) tax return for the year in which the NOL arose. Generally, if there is no valid waiver, the NOL must be carried first to the earliest year of the carryback period.
If multiple NOLs are applicable to a single year, the loss associated with the earliest tax year is applied first. That is, the NOLs are used up in the order of the years in which they were incurred. The oldest is used first, then the next oldest, and so on.
For example: X Corporation’s first taxable year was 2015, and it had taxable income of $10,000 in both 2015 and 2016. In 2017, X Corporation reported a $10,000 NOL. In 2018, X Corporation reported a $20,000 NOL. X Corporation did not elect to waive the carryback period in any of these tax years. X Corporation wants to take advantage of the CARES Act provisions permitting it to make a claim for a quick refund resulting from the carry back of an NOL by utilizing Form 1139.
Under the rules discussed above, X Corporation has multiple NOLs that are applicable to a single year, in that the 2017 NOL can be carried back to the 2015 tax year (2-Year Carryback Period) and the 2018 NOL can also be carried back to 2015 as a result of the CARES Act (5-year carryback period for NOLs arising in tax years beginning in 2018).
Accordingly, since the oldest NOL must be utilized first, X Corporation is required to amend its 2015 tax return to adjust its 2015 income for the NOL carried back from 2017. X Corporation can then also file Form 1139 and utilize a portion of the 2018 NOL to reduce its taxable income from 2016. The remaining $10,000 loss from 2018 will be carried forward to X Corporation’s 2019 tax year. X Corporation’s claim for a quick refund must be made no later than June 30, 2020.
Time is of the essence for those companies seeking a refund based on NOL carrybacks from years earlier than 2018. I encourage anyone in this situation to contact their Marks Paneth advisor or tax advisor to ensure that appropriate action is taken by the June 30 deadline.
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