IRS & Treasury Clarify Refund Opportunities Provided by CARES Act
On April 9, 2020, the IRS and U.S. Department of the Treasury (Treasury) issued additional guidance clarifying and expanding on aspects of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) related to refund claims for taxpayers affected by the retroactive provisions included in the new law.
Revenue Procedure 2020-24 addresses Section 2303(b) of the CARES Act, which allows losses arising in tax years 2018, 2019 or 2020 to be carried back five years. The revenue procedure helps taxpayers facilitate these carrybacks by providing guidance on a series of elections taxpayers may file related to waiving or reducing the carryback period.
Election to Waive Net Operating Loss (NOL) Carrybacks
A taxpayer may make an irrevocable election to waive the carryback period for a NOL arising in a taxable year beginning in 2018 or 2019 by attaching a separate statement for each year to its federal income tax return for the first taxable year ending after March 27, 2020. The election must include the following information:
- A statement that the taxpayer is electing to apply §172(b)(3) under Revenue Procedure 2020-24
- The taxable year for which the statement applies
Fiscal-year taxpayers with a NOL arising in a taxable year beginning before January 1, 2018, and ending after December 31, 2017, have until July 27, 2020, to make or revoke an election to waive a NOL carryback. Taxpayers may file such elections where they file their federal income tax returns by attaching the required statement to an amended return, Form 1045 or Form 1139, as applicable. The amended return, Form 1045 or Form 1139 need only have the taxpayer’s name, address and identification number included on the form. The statement must include the following information:
- The section under which the election is being made
- The period for which it applies
- The taxpayer’s basis and entitlement to make the election
- The statement “Filed pursuant to Revenue Procedure 2020-24” written at the top
Election to Reduce Carryback Period for Years to Which IRC §965 Applies
A taxpayer also may elect to exclude all “§965 years” from the carryback period for a NOL arising in a taxable year beginning in 2018, 2019 or 2020. This election allows taxpayers to disregard all taxable years in which §965 applied when carrying back a NOL. The §965 years still must be included for purposes of counting the five taxable years in the carryback period for the NOL.
Similar to the election to waive NOL carrybacks, the irrevocable election to exclude §965 years from the carryback period 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. For a NOL arising in a taxable year beginning after December 31, 2019, and before January 1, 2021, this election must be made by no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the taxable year in which the NOL arises.
This election is made by attaching a statement to whichever of the following is filed first:
- The federal income tax return for the taxable year in which the NOL arises
- Form 1139 or Form 1045, as applicable
- The amended federal income tax return applying the NOL to the earliest taxable year in the carryback period that isn’t a §965 year
The election statement must include the following information:
- A statement that the taxpayer is electing to apply §172(b)(1)(D)(v)(I) under Revenue Procedure 2020-24
- The taxable year in which the NOL arose
- A list of the years to which §965 applies for the taxpayer
Extension of Time to File Application for Tentative Carryback Adjustment
Revenue Procedure 2020-24 also provides that fiscal-year taxpayers with a NOL arising in a taxable year beginning before January 1, 2018, and ending after December 31, 2017, who file an application for tentative refund on either Form 1045 or Form 1139 with respect to a NOL carryback will be treated as having timely filed if the application is filed no later than July 27, 2020.
The IRS and Treasury also released Notice 2020-26 on April 9, 2020. The notice provides further relief to taxpayers seeking refunds related to the retroactive provisions included in the CARES Act by extending the deadline for filing an application for a tentative carryback adjustment with respect to NOLs arising in taxable years beginning on or after January 1, 2018, and ending on or before June 30, 2019.
While the CARES Act specifically provided a due date postponement for taxpayers filing quick refund claims related to the recovery of refundable alternative minimum tax credits, giving applicable taxpayers until December 31, 2020, to file those claims, it didn’t include similar relief for taxpayers filing a claim related to NOL carryback adjustments. Accordingly, Notice 2020-26 grants a six-month extension of time to file Form 1045 or Form 1139, as applicable, to taxpayers who have a NOL arising in a taxable year beginning on or after January 1, 2018, and ending on or before June 30, 2019. The extension granted by Notice 2020-26 is strictly limited to tentative refund requests to carry back a NOL and doesn’t extend the time to carry back any other item.
For example, in the case of a NOL that arose in a taxable year ending on December 31, 2018, a taxpayer normally would have until December 31, 2019, to file Form 1045 or Form 1139, as applicable. However, due to the relief granted by Notice 2020-26, the taxpayer will now have until June 30, 2020, to file the applicable tentative refund form.
To qualify for the extension of time to request a tentative refund based on a NOL carryback, taxpayers must perform the following actions:
- File the applicable form (Form 1139 or Form 1045) no later than 18 months after the close of the taxable year in which the NOL arose, i.e., no later than June 30, 2020, for a taxable year ending December 31, 2018.
- Include the following statement on the top of the form: “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”
Please note: the IRS posted a statement on its website on April 8, 2020, encouraging taxpayers to await further instruction before using traditional processes to file any corporate or individual refund claims. The IRS is currently exploring available options and expects to issue filing instructions in the coming days.
We’ll continue to monitor tax-related legislation and keep you up to date with relevant news, changing guidelines and new regulations in the BKD COVID-19 Resource Center. As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. If you have questions, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.