IRS Clarifies COVID-19 Relief for Taxpayers Claiming Net Operating Losses and Minimum Tax Credits

In two releases issued on April 9, 2020, the IRS has provided valuable guidance to taxpayers waiting to claim refunds resulting from changes to net operating loss (“NOL”) carryback and minimum tax credit rules under the CARES Act.

In summary, Notice 2020-26 grants corporations a six-month extension to file an application for a tentative refund on Form 1139 (or Form 1045 for individual taxpayers, trusts and estates) for the carryback of an NOL that arose in a year that began during calendar year 2018 and ended on or before June 30, 2019.

Revenue Procedure 2020-24 provides procedures to assist with carrying back NOLs arising in 2018, 2019 or 2020 to each of the five preceding tax years, as follows:

• Waiving the carryback period for an NOL arising in a tax year beginning after December 31, 2017 and before January 1, 2020;
• Disregarding certain amounts of foreign income subject to the Section 965 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 January 1, 2018 and ended after December 31, 2017.

Background

Net Operating Losses

Under the CARES Act, an NOL arising in a tax year beginning in 2018, 2019 or 2020 can be carried back for five years to fully offset income.  Losses must be carried back to the earliest year available for offset.  As losses will be carried back to pre-2018 tax years, corporate taxpayers may benefit from a tax refund at favorable rates of up to 35% (rather than 21% as under the Tax Cuts and Jobs Act).  A taxpayer entitled to carry back its NOLs can instead elect to waive the carryback period for an NOL for any taxable year. The election to waive the carryback period is irrevocable.

Corporate taxpayers may file Form 1139, Corporation Application for Tentative Refund, to carry back NOLs (or Form 1045 for individuals, trusts and estates) and obtain a quick refund.  Form 1139 is due within 12 months of the close of the taxable year in which the NOL arose. Within 90 days, the IRS is permitted to perform a limited review of the application and issue a quick tentative refund based on the NOL carryback. The IRS may examine and adjust the loss year return at a later date to determine the proper amount of the NOL available for carryback. Corporate refunds greater than $5 million ($2 million for individuals and other taxpayers) are also subject to review by the Joint Committee of Taxation.  Form 1139 instructions currently provide that corporations carrying back to an IRC Sec. 965 transition year may not use Form 1139 to claim a refund.

The CARES Act provides that NOLs arising in tax years beginning before January 1, 2018 and ending after December 31, 2017, may be claimed on Form 1139 (or Form 1045) so long as the tentative refund claim is filed no later than July 27, 2020. The CARES Act also provides that elections to waive an NOL carryback, reduce a carryback period or revoke an election to waive the carryback under IRC Sec. 172(b) must be filed by July 27, 2020, but does not specify how these elections are to be made.

The CARES Act did not provide an extension of time to file Form 1139 (or Form 1045) with respect to the carryback of NOLs that arose in a taxable year that began during calendar year 2018 and ended on or before June 30, 2019.  As a result, taxpayers were limited to claiming refunds for taxable years beginning in 2018 on Form 1120X, Amended Corporation Income Tax Return (or Form 1040X for individuals), which would significantly delay the ability to obtain liquidity.

IRC Sec. 965 Transition Years

Under the CARES Act, taxpayers carrying back an NOL to a year with IRC Sec.  965 (transition) income from foreign subsidiaries are automatically treated as having made an IRC Sec. 965(n) election, which excludes IRC Sec. 965 income from determining the NOL for that year.  As a result, taxpayers will only be able to carry back NOLs to offset non-IRC Sec. 965 income, which may impact foreign tax credit calculations and subsequent transition tax installments.  In the alternative, a taxpayer may affirmatively elect to exclude IRC Sec. 965 years from the carryback period. 

Minimum Tax Credits

The CARES Act also provides taxpayers with alternative minimum tax credit carryforwards with a fully refundable credit that can be claimed in 2019.  In the alternative, a corporation can elect to claim the fully refundable credit amount in 2018 by filing Form 1139, Corporation Application for Tentative Refund by December 30, 2020.

See the EisnerAmper alert on the CARES Act.

Notice 2020-26 and Revenue Procedure 2020-24

Six-Month Extension to Carryback NOLs Arising in Calendar Year 2018 and on or Before June 30, 2019

While the CARES Act provides a corporation with the ability to file Form 1139 for tax years beginning in 2018 by making an election to claim the fully refundable AMT credit in 2018, notably, it did not provide an extension of time to file Form 1139 (or Form 1045) for the carryback of NOLs that arose in a taxable year that began during calendar year 2018 and ended on or before June 30, 2019.  Therefore, Notice 2020-26 provides taxpayers with a six-month extension to timely file Form 1139 (or Form 1045) to carryback an NOL that arose in a taxable year that began during calendar year 2018 and that ended on or before June 30, 2019.  The extension is limited to the carryback of an NOL and does not extend the time to carry back any other item.  Therefore, the guidance presumes that more than one Form 1139 may be filed by a taxpayer.

The Notice provides an example of the mechanics of the extension as it relates to both NOLs and other credit items as follows:

In the case of an NOL that arose in a taxable year ending on December 31, 2018, a taxpayer normally would have until December 31, 2019, to file the Form 1045 or Form 1139, as applicable, but due to this relief, will now have until June 30, 2020, to do so. For this same taxpayer, if the taxpayer is a corporation, the deadline to claim a minimum tax credit described in IRC Sec. 53(e)(5) is December 30, 2020, but in order to file one application for a tentative refund and claim both the NOL carryback and the minimum tax credit at the same time, the taxpayer must do so by the earlier of the two deadlines.

To take advantage of the extension of time, Form 1139 (or Form 1045) must be filed no later than 18 months after the close of the taxable year in which the NOL arose (that is, no later than June 30, 2020, for a taxable year ending December 31, 2018). The application for tentative refund must include the notation “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment” at the top of the form.

Elections for Fiscal Years Beginning Before January 1, 2018 and Ending After December 31, 2017

The CARES Act provides taxpayers with NOLs arising in taxable years beginning before January 1, 2018 and ending after December 31, 2017 with the opportunity to claim a refund on Form 1139 (or Form 1045) and to make an election to waive any carryback period, reduce any carryback period or revoke an election made under IRC Sec. 172 to waive any carryback period by July 27, 2020.  Notably, the CARES Act did not include procedures for making the above-referenced elections.   

According to Revenue Procedure 2020-24, the election statement must note that it is “filed pursuant to Rev. Proc. 2020-24” at the top. The statement must also indicate the section under which the election is being made and set forth information to identify the election, the period for which it applies, and the taxpayer’s basis and entitlement to make the election.  The statement is attached to, and filed with, an amended return, Form 1045 or Form 1139 containing only the taxpayer’s name, address, and taxpayer identification number.

The above elections are not available to taxpayers with NOLs generated in 2018 or later.

Election to Waive the NOL Carryback for Tax Years Beginning in 2018 and 2019

Under Revenue Procedure 2020-24, a taxpayer may elect to waive the carryback for NOLs arising in tax years beginning in 2018 or 2019.  The election is made no later than the due date (including extensions) for filing the taxpayer’s federal income tax return for the first taxable year ending after March 27, 2020. Once made, the election is irrevocable.

To make the election, taxpayers must attach a separate statement for each tax year (2018 and/or 2019, as applicable) for which it intends to make the election.  The election statement must state that the taxpayer is electing to apply IRC Sec. 172(b)(3) under Revenue Procedure 2020-24 and the taxable year for which the statement applies. 

IRC Sec. 965 Transition Years and the Carryback of NOLs Generated in 2018, 2019 or 2020

The CARES Act permits taxpayers to elect to exclude all IRC Sec. 965 transition years from the carryback period for an NOL arising in a taxable year beginning in 2018, 2019 or 2020. An election to exclude IRC Sec. 965 transition years from the carryback period may be attractive to taxpayer who elected under IRC Sec. 965(h) to pay their transition tax in installments over eight years as it allows a taxpayer to disregard those taxable years when determining whether an overpayment exists and a refund can be claimed. The taxpayer who makes an election to exclude IRC Sec. 965 transition years must still include IRC Sec. 965 years when counting the five taxable years in the NOL carryback period and cannot extend a carryback beyond the five taxable years.

For NOLs arising in 2018 and 2019, an election must be made no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the first taxable year ending after March 27, 2020 (the date of enactment of the CARES Act). For NOLs arising in 2020, the election is made no later than the due date, including extensions, for filing the taxpayer’s 2020 tax return.

The election statement must state that the taxpayer is electing to apply IRC Sec. 172(b)(1)(D)(v)(1) under Revenue Procedure 2020-24, and reference the taxable year in which the NOL was generated and the IRC Sec. 965 year(s) being excluded. Once made, the election is irrevocable.

The election is made by attaching the election statement to the earliest filed (after April 9, 2020), of:

1. The federal income tax return for the taxable year in which the NOL arises;
2. The Taxpayer’s Form 1139, Corporation Application for Tentative Refund (or Form 1045) to carry back the NOL; or
3. The amended federal income tax return carrying back the NOL to the earliest taxable year in the carryback period that is not an IRC Sec. 965 year.

A taxpayer making the election via an amended return must attach the election statement to each amended return that is filed.   

To the extent an NOL is carried back under the CARES Act to an IRC Sec. 965 year, the deemed IRC Sec. 965(n) election may not be waived.  If the deemed election under IRC Sec. 965(n) applies to an IRC Sec. 965 year for which a taxpayer previously revoked or did not previously make an election under IRC Sec. 965(n), the deemed election shall only apply to NOL carrybacks available under the CARES Act.

The IRS intends to issue further guidance on filing requests for tentative refunds for taxpayers with outstanding Section 965(h) transition tax liabilities.

NOLs Carrybacks and Consolidated Groups

Revenue Procedures 2020-24 provides that the agent of a consolidated group is responsible for making the election to forego the NOL carryback period or to exclude the IRC Sec. 965 transition year(s). With regard to a consolidated tax year, the term “NOL” includes the excess of deductions over gross income, as determined under Treas. Reg. Section 1.1502-11(a) (without regard to any consolidated net operating loss deduction).

EisnerAmper will continue to keep you informed of relevant new developments regarding the tax implications of the coronavirus pandemic.