The CARES Act (Pub. L. No. 116-136), enacted on March 27, 2020, provides emergency assistance and addresses health care concerns of individuals, families, and businesses affected by the 2020 coronavirus pandemic. Sections 2303, 2305, and 2306 of the CARES Act contain changes to net operating losses (NOLs), business interest expense deductions, and refundable minimum tax credit (MTC). These major changes give rise to a significant carryback claim opportunity.
What Changed for Corporations Under the CARES Act?
Prior to the CARES Act, NOLs arising in years ending and beginning after 2017 were not allowed to carryback, had an unlimited carryforward period, and were limited to 80% of taxable income. The CARES Act retroactively modified and expanded those rules. Under the CARES Act, NOLs arising in years beginning 2018 through 2020 may be carried back five years and the 80% NOL deduction limit is temporarily lifted for NOL carryforwards to years beginning before January 1, 2021.
Under a long-standing provision, IRC §172(b)(3), a corporation can elect to waive this five-year carryback. A corporation making an election under section 172(b)(3) can still take advantage of the temporary changes to the 80% limitation rules and offset 100% of taxable income with NOL carryforwards that would otherwise be subject to the limitation.
There are complicated interactions with other rules, particularly for multinational corporations. Those corporations that repatriated income under IRC §965 between 2016 and 2019 may not offset inclusion income under a deemed election under IRC §965(n). However, CARES provides for an election to skip IRC §965 years while still applying the NOL carryback to other years.
The impact on other tax attributes needs to be carefully considered as well. For example, general business credits (GBCs) and foreign tax credits (FTCs) may be freed up by the NOL carryback and may now carryback or forward to other years. The alternative minimum tax (AMT) may also come into play, not only with a minimum tax but with the limitation for general business credits as well.
The separate return year rules come back into play with consolidated return groups. NOLs may need to be allocated to a departing consolidated return member.
These new rules provide many planning opportunities to provide an infusion of cash to cash-strapped businesses, but it is critical to evaluate all the possible scenarios to avoid any unintended negative consequences.
As businesses struggle with economic conditions created by the coronavirus pandemic, many companies are looking for ways to improve the bottom line or even just to survive. Companies with NOLs generated in the 2018 fiscal year and 2019 calendar and fiscal years may benefit from timely filed Tentative Refund (1139) claims.
Under standard filing procedures for 1139 claims, a corporation must file Form 1139 within 12 months of the end of the tax year in which the NOLs arose. The IRS then conducts a limited examination of the claim and issues a refund within 90 days of the filing date of the claim or 90 days from the last day of the month the tax return was due.
The IRS issued relaxed rules through guidance in Notice 2020-26 allowing a six-month extension for filing 1139 claims for tax years beginning after January 1, 2018, and ending before June 20, 2019.
Manage NOLs and More with Corporate Tax Analyzer
Achieve new efficiencies by calculating, tracking, and analyzing federal and corporate income tax attributes automatically over multiple years – including net operating losses, carryforwards, and carrybacks.
Extended Filing Period Example: Corporation A is a fiscal year filer with a year-end of June 30. In the fiscal year beginning July 1, 2018, the corporation incurs a taxable loss that is now eligible for a five-year carryback. Under normal rules, the corporation would need to file an 1139 claim within one year of its June 30, 2019, year-end—i.e., June 30, 2020. Under Notice 2020-26, the corporation now has until December 31, 2020.
Year Ends for 2018 and 2019 and
Deadlines for Filing F1139
Notice 2020-26 Extension*
2018 Filing Year
2019 Filing Year
2020 NOL Planning Opportunities
Many corporations expect to generate losses in 2020 but will not be able to file 1139 claims until they file their 2020 tax return. This won’t be until at least the beginning of 2021. However, it is not too early to start planning and modeling the impact of those NOLs, not only for purposes of strategic cash tax management but for tax accounting purposes as well.
Taxpayers should consider the effect on prior year global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), base erosion and anti-avoidance tax (BEAT), GBC, FTC, and AMT. The interaction of an NOL carryback with these provisions could result in additional taxes and the permanent loss of some credits.
Taxpayers should also consider the impact on financial statements. Quantifying the impact is a critical component of the income tax provision recorded in the company’s financial statements. For example, the availability of NOL carrybacks may impact a company’s valuation allowance assessment.
These competing priorities and provisions that taxpayers must consider after the CARES Act further emphasize the importance of proactive tax planning and having the right tools in place to do it.
Track whether or not a state follows the CARES Act with an easy-to-scan summary of state conformity to the stimulus bill.