As if business owners did not have enough to worry about in light of various deadlines of all types including when and whether to submit Paycheck Protection Program ("PPP") loan applications, how to account for the use of the funds, whether to return the PPP borrowed monies and when and how to file applications for forgiveness of the PPP loans, whether and when to claim tax credits for employee retention, and how to defer the payment of the employer side of Social Security taxes, the Coronavirus Aid, Relief, and Economic Security ("CARES Act") has given owners another issue to deal with and yet another deadline to comply with. Owners must make sure their businesses take action by June 30, 2020 in order to carry back 2018 net operating losses ("NOL") to the prior tax years of 2013 - 2017 to receive a refund on all or part of the taxes paid in those years.
With the enactment of the Tax Cuts and Jobs Act of 2017 ("TCJA"), carrybacks of NOL for any tax year beginning with 2018 were not allowed, and NOL could only be carried forward for use in future tax years in an amount equal to the lesser of the aggregate of the NOL carryovers or eighty percent (80%) of the taxable income computed without regard to the deduction allowed. Through Section 2303 of the CARES Act, NOL arising in the tax year 2018, 2019, or 2020, can now be carried back to each of the five taxable years preceding the taxable year in which the NOL arises. Taxpayers must first take into account the NOL in the earliest taxable year during the five year carryback period and then must carry forward the unused amounts to each succeeding taxable year. For tax years 2018, 2019, or 2020, taxpayers can take a NOL deduction equal to 100% of taxable income for the applicable year.
Section 6411 of the Internal Revenue Code allows a taxpayer to file an application for a tentative carryback adjustment of the tax liability for a prior tax year that is affected by a NOL carryback. To accomplish this, taxpayers that are corporations must make the application on Form 1139 and taxpayers other than corporations must make the application on Form 1045. These applications must be filed within 12 months of the close of the taxable year in which the NOL arose. The CARES Act did not provide additional time for taxpayers to file tentative carryback adjustment applications with respect to a NOL that arose in the tax year 2018. As a result, the time period to file these applications expired on December 31, 2019, some three months prior to the effective date of the CARES Act.
To remedy this issue, the IRS granted a six-month extension of time to file a Form 1045 or Form 1139. For calendar year taxpayers, this means that a taxpayer that had a NOL in 2018 must file the applicable form by June 30, 2020 to take advantage of the carryback procedure for a refund of taxes paid in one or more of the 2013 - 2017 tax years in which the taxpayer generated taxable income on which it paid taxes. Any excess NOL remaining will be carried forward to 2021, but only 80% can be used in each future year.
Taxpayers that miss the June 30, 2020 deadline could also file an amended 2018 tax return to carry back the 2018 NOL within three years after they filed a timely 2018 tax return. However, the review time for amended tax returns will be longer than for the quick carryback process.1
A simplified example is helpful to understand this provision of the CARES Act. Assume that ABC Corp., a C corporation and a calendar year taxpayer, generated a $300,000 NOL in 2018, pays $30,000 in taxes for each $100,000 of taxable income it generates and had taxable income of $100,000 in each of 2013, 2014, 2016 and 2017. For 2015, ABC Corp. broke even (no taxable income and no NOL). Under the TCJA, when ABC Corp. filed its 2018 Form 1120, it could not carryback its 2018 NOL to any prior year and was required to carry the NOL forward to future tax years for use at 80%, resulting in its only being able to save paying $72,000 of taxes in future years (i.e., 80% of the assumed $90,000 of taxes paid on $300,000 of future taxable income). Through the CARES Act amendments, ABC Corp. can now file a Form 1139 for 2018 to obtain a refund of all $90,000 of the taxes it paid in 2013, 2014 and 2016 ($30,000 in each year). If properly filed by the June 30, 2020 deadline, ABC Corp. can obtain in fairly short order a $90,000 tax refund as opposed to paying $72,000 less in taxes in future years.
As illustrated by the example above, the NOL carryback provision of the CARES Act can provide your business with significant savings at a time when extra cash may be of great benefit. If your business had a NOL for its 2018 tax year, you must act by June 30, 2020 to generate the ability to obtain a federal tax refund under this provision of the CARES Act.
1 Although the CARES Act is silent as to whether or not a taxpayer that fails to file for a carryback of NOL to a prior tax year could still carry forward this NOL to future tax years, the Internal Revenue Service recently released a Revenue Procedure (Rev. Proc. 2020-24) that allows for the waiver of the five-year carryback period for 2018 or 2019 NOL's on a timely filed tax return filed for 2019 or 2020. Businesses with 2018 NOL's that miss the June 30, 2020 deadline to file for a carryback and that do not want to amend their 2018 tax returns to claim the carryback should file waiver elections on their 2019 or 2020 timely filed tax returns to avoid running the risk of not being able to use their 2018 NOL's at all.
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