Changes to Net Operating Losses
The Coronavirus Aid, Relief and Economic Security (“CARES”) Act changed the treatment of net operating losses (“NOLs”) that are generated in tax years 2018, 2019, and 2020. Under the Tax Cuts and Jobs Act (“TCJA”), NOLs that were generated during taxable years beginning after December 31, 2017, could only be carried forward, not back, and they could only offset 80 percent of the taxable income in the year they were used. The CARES act changed these rules.
Now, the NOLs for 2018, 2019, and 2020 can be carried back up to five years. This allows for an immediate claim for refund for taxpayers who had taxable income during the carryback time period. Additionally, the 80 percent limitation has been removed, and NOLs can offset up to 100 percent of taxable income. These rules apply to both corporate and individual taxpayers.
For taxpayers that were subject to a section 965 inclusion in any of the carryback years, the taxpayer can elect to skip that year for purposes of the NOL carryback period. The carryback provision will need to be closely reviewed for any year in which there is a 965 inclusion amount.
Any corporate taxpayer with a loss in 2018 or 2019 should review the five prior years’ returns for a refund opportunity. If a refund opportunity exists, a quick refund claim can be filed on Form 1139 in many circumstances. However, for taxable periods ending December 31, 2018, the carryback claim filed on Form 1139 must be filed no later than June 30,, 2020. After that date the refund claim would need to be filed on Form 1120X. The advantage of filing a Form 1139 over a Form 1120X is that a Form 1139 is required to be processed within 90 days by the IRS. The IRS has provided filing procedures that allow submission of Form 1139 by fax to allow the IRS to begin processing these claims even while most of their operations are shut down.
Corporate taxpayers should consider accelerating the filing of their 2019 income tax returns if they are expected to report a loss that could generate a refund on a carryback claim. Additionally, taxpayers should review the other provisions in the CARES Act that may increase their deductions such as changes to 163(j) and the qualified improvement property rules as well as other opportunities to increase or create a loss. Additionally, corporate taxpayers should examine their 2018 income tax returns for additional loss opportunities by taking into account changes available due to the modification of the qualified improvement property rules before filing their refund claims.
Individual taxpayers will need to take into account the CARES Act changes to the excess business loss rules and qualified improvement property rules for 2018 before determining whether they have an NOL available to carry back at the personal level.
Taxpayers may also elect to forego the carryback period entirely. To forego the carryback period for years beginning in 2018 and 2019, a taxpayer must make that election on the tax return for the first year ending after March 27, 2020. For calendar year taxpayers this election would be made on the 2020 income tax returns.
Individuals will need to determine the impact of the NOL carryback to their effective tax rates in years with significant capital gains. The election to forgo the carryback applies to ALL years and the claim MUST be carried back to the earliest year first. The election to forgo the carryback applies only to the year it is made. A taxpayer could forgo the carryback of the 2018 loss but carryback the 2019 loss.
Changes to AMT Credit Refunds
The TCJA eliminated AMT tax for corporate taxpayers’ tax years after 2017. As a result, taxpayers were eligible to offset their income tax liability by the AMT and receive a refund of 50 percent of the excess for the years 2018–2020, with any remaining amount refunded in 2021.
The CARES Act changed these rules to allow a refund of any excess credits immediately in 2019. There is also an election that can be made to have all the credit refunded as part of the 2018 tax return. In order to make this election, the taxpayer can file a Form 1139 to claim the refund. An advantage of filing a Form 1139 is that it is required to be processed within 90 days by the IRS. The IRS has provided filing procedures that allow submission of Form 1139 by fax to allow the IRS to begin processing these claims even while most of their operations are shut down.
Any taxpayer with an AMT credit carryover into 2019 should immediately review their situation to determine whether they would like to claim the remaining excess AMT credit on the 2019 income tax return when filed or they would like to make an election to file and claim on the 2018 tax return by filing a Form 1139. Taxpayers should consider when they are likely to file their 2019 returns and whether any of the excess credit will be used to offset tax due on the 2019 return.
