The IRS has released additional guidance in Notice 2020-26 and Rev. Proc. 2020-24 regarding the provisions of the CARES Act, allowing net operating losses (NOLs) to be carried back to earlier years.  The new guidance continues the policy evident in other recent IRS pronouncements of removing impediments to obtaining refunds quickly, within the limitations imposed by law.

Notice 2020-26

Notice 2020-26 grants taxpayers an extension of time to file an application on Form 1139 (for corporations) or 1045 (for individuals) for a tentative carryback adjustment (expedited refund) due to an NOL that can be carried back from a taxable year beginning in 2018.  In general, IRC § 6411 allows these applications but requires them to be filed within 12 months of the close of the taxable year of the loss.  As a result, the time for filing the application for a loss arising in calendar 2018 expired at the end of 2019.  An expedited refund is important because the alternative is to file an amended return for the affected year or years, which requires significantly longer to process.  Expedited refund applications are typically processed within 45-90 days.  A refund claim on an amended return, by contrast, must be fully reviewed by the IRS (and in some cases go through lengthy Joint Committee on Taxation review procedures) before the refund can be issued. 

Notice 2020-26 extends by six months the time for filing an expedited refund application on Form 1139 for an NOL carryback arising in a taxable year beginning in 2018 and ending on or before June 30, 2019.  For example, a calendar year corporation can file Form 1139 to carry back its NOL from 2018 by June 30, 2020.  The application must be mailed to the IRS Service Center, which in light of current events creates a risk of processing delays.  But the sooner the application is filed, the sooner the IRS can begin working on it, as these claims are processed on a “first-come, first-served” basis.

The Notice points out that the CARES Act allows an application for an expedited refund of remaining AMT credits to be filed by December 31, 2020.  However, the Notice notes that the applications for expedited refunds attributable to NOL carrybacks and AMT credits can be filed simultaneously.  Form 1139 should be marked at the top, “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”

Rev. Proc. 2020-24

Rev. Proc. 2020-24 describes the procedures for taking certain actions under the CARES Act and related prior guidance.  Certain actions must be taken by the due date (including extensions) of the tax return for the taxpayer’s first taxable year ending after March 27, 2020, the date of enactment of the CARES Act.  The Rev. Proc. also provides useful guidance regarding the carryback of NOLs to the year or years in which the taxpayer reported an income inclusion under § 965(a) (the repatriation toll charge).

•    Waiving the carryback of NOLs from taxable years beginning in 2018 or 2019

A taxpayer may choose not to carry back an NOL from a year, even though the carryback is authorized by the CARES Act. To do so, the taxpayer must attach a statement to its tax return for the first taxable year ending after March 27, 2020, for each year (2018 or 2019) for which the carryback is waived.  The election statement must state that the taxpayer is electing to apply § 172(b)(3) under Rev. Proc. 2020-24 and the taxable year for which the statement applies. This election is irrevocable.

•    Election to exclude section 965 years from the carryback period

The CARES Act allows a taxpayer to carry back losses to the five taxable years preceding the loss year.  Taxpayers that included an amount in income under § 965(a) in one or more prior years are allowed to treat those years as not part of the carryback period authorized by the Act.  For example, a taxpayer that reported a § 965 inclusion in calendar 2017 can carry a loss back from 2019 to the years 2014-2016 and 2018, in chronological order, but omitting 2017.  This avoids certain disadvantages and complications connected with carrying a loss to a § 965 inclusion year.  

The Rev. Proc. provides that the election to exclude § 965 years from the carryback period must be attached in the form of a statement to whichever of the following is filed earliest (after the date of the Rev. Proc.):

o    The federal income tax return for the year of the loss; 
o    The expedited refund claim for the year of the loss; or
o    The amended federal income tax return reporting the carryback of the loss to the earliest year that is not a § 965 inclusion year.

If a taxpayer claims the NOL by filing an amended return for a year in the carryback period, a statement must also be attached to that amended return.  The Rev. Proc. also provides specific guidance with respect to taxpayers filing consolidated returns.
For taxpayers that do carry a loss back to a § 965 inclusion year, the CARES Act provides that the taxpayer is deemed to make the election provided in § 965(n) not to apply the NOL against the § 965 inclusion.  The Rev. Proc. states that this deemed election cannot be waived.  However, in a useful clarification, the Rev. Proc. provides that a taxpayer that has not previously made the § 965(n) election, or has revoked that election, applies the deemed election only to the loss carryback.  Therefore, it appears that a taxpayer that previously deducted loss carryforwards against the § 965 inclusion is not required to amend their prior return and (possibly) pay additional tax.

•   Election to carry back losses from taxable years beginning in 2017 and ending in 2018

The CARES Act made a technical correction to the effective date of the NOL provisions of the TCJA.  As enacted, the TCJA disallowed loss carrybacks from taxable years ending after 2017.  The CARES Act changed this effective date to taxable years beginning after 2017.  As a result, a loss arising in a fiscal year that began in 2017 and ended in 2018 can now be carried back two years under pre-TCJA law.

A taxpayer may request an expedited quick refund due to such a loss, or may elect to waive the carryback of the loss, on or before July 27, 2020.  A statement must be attached to an amended return, Form 1139, or Form 1045 containing specified information.

A&M says:

The IRS continues to provide guidance and clarification with respect to the CARES Act, with a view to helping taxpayers obtain the benefits provided by the Act as quickly as possible consistent with the law.  Nevertheless, each of the benefits described above comes with deadlines and procedural requirements that must be observed.  We are ready to help clients navigate these choppy waters to secure the best and quickest possible benefit of the new law.