United States: Beware An Invalid Election To Waive The CARES Act NOL Carryback Period

Section 2303 of the CARES Act¹ made several changes to the tax law regarding net operating losses arising in tax years beginning after December 31, 2017, and ending before January 1, 2021.² One change provides that NOLs arising in 2018, 2019, or 2020 must be carried back to the earliest of the preceding five years, and that after that carryback, any remaining unused portion of those NOLs is carried forward indefinitely.³ However, the five-year carryback period can be waived if an election to waive it is properly and timely made for each year in which that NOL arises.⁴

This article explains how an improper or late election to waive the five-year carryback period when combined with a failure to timely carry back 2018 and 2019 NOLs could cause the taxpayer to lose those NOLs forever.⁵ Assume that A, who is an individual⁶ taxpayer, has taxable income in 2013 through 2017 and NOLs arising in 2018 and 2019 so that the amount of the 2013-2017 taxable income is sufficient to absorb the 2018 and 2019 NOLs.⁷ Thus, assume A has a $200,000 NOL⁸ in 2018, a $300,000 NOL in 2019, and annual taxable income of $100,000 in 2013 through 2017.

The CARES Act effectively requires A to decide whether she wants to carry back the 2018 and 2019 NOLs five years or waive the carryback period and carry forward the NOLs indefinitely. If A does not elect to waive the carryback period for the 2018 and 2019 NOLs, then, generally, to claim a quick refund for carrying back the 2018 NOL to 2013 and 2014,⁹ she would have needed to file a 2018 Form 1045 by June 30, 2020.¹⁰ And to claim a quick refund for carrying back the 2019 NOL to 2015 through 2017,¹¹ A would need to file a 2019 Form 1045 by December 31, 2020.¹² Alternatively, A can carry back the 2018 and 2019 NOLs to 2013 through 2017 by filing an amended federal income tax return for each tax year from 2013 through 2017.¹³

If, however, A decides to waive the carryback period for each of the 2018 and 2019 NOLs, the deadline to make each election is no later than October 15, 2021, which is the due date (including extensions) for filing her 2020 federal income tax return.¹⁴ If A properly and timely makes the election to waive the carryback period for the 2018 NOL and the 2019 NOL, both NOLs would be carried forward indefinitely. A problem may arise, however, if A does not properly or timely elect to waive the carryback period for the 2018 and 2019 NOLs.

Assume that A does not want to carry back either the 2018 NOL or the 2019 NOL and would like to carry forward both NOLs, so she does not file a 2018 Form 1045 by June 30, 2020, nor does she file a 2019 Form 1045 by December 31, 2020. If A files her 2020 Form 1040 by the extended due date of October 15, 2021, but does not properly make the election to waive the carryback period for the 2018 and 2019 NOLs on her 2020 Form 1040, or if she files her 2020 Form 1040 late, she may be unable to waive the carryback period for either the 2018 or 2019 NOL.¹⁵ If A cannot waive the carryback period for the 2018 and 2019 NOLs, she may be unable to carry either NOL to a subsequent year.¹⁶ However, even though the deadlines for filing A's 2018 and 2019 Forms 1045 would have passed, and even though, after October 15, 2021, the deadlines in general for amending A's 2013-2017 returns would have passed,¹⁷ A would still be able to carry back the 2018 NOL to 2013 and 2014¹⁸ by filing amended 2013 and 2014 returns by October 17, 2022, which is within three years from the due date (including extensions) of her 2018 return because 2018 was the year in which the NOL arose.¹⁹ Similarly, A would be able to carry back the 2019 NOL to 2015 through 2017²⁰ by filing amended 2015-2017 returns by October 16, 2023, which is within three years from the due date (including extensions) of her 2019 return because 2019 was the year in which the NOL arose.²¹ Ultimately, if A does not carry back the 2018 NOL to 2013 and 2014 by filing amended 2013 and 2014 returns by October 17, 2022, she could lose the 2018 NOL forever.²² Similarly, if A does not carry back the 2019 NOL to 2015 through 2017 by filing amended 2015-2017 returns by October 16, 2023, she could also lose the 2019 NOL forever. 

Taxpayers who have NOLs generated in 2018 or 2019 should review their federal income tax returns for the five preceding tax years to determine if they have sufficient taxable income in those years to absorb any portion of the 2018 or 2019 NOLs. A taxpayer in that situation should decide whether it is more beneficial to carry back or carry forward the 2018 or 2019 NOL. If a taxpayer decides to carry back a 2018 or a 2019 NOL, the taxpayer should be mindful of the due dates to file 2018 and 2019 Forms 1045 and 2013- 2018 Forms 1040-X. If the taxpayer decides instead to carry forward the 2018 or 2019 NOLs, it is imperative that the election to waive the carryback period is properly and timely made for each year in which the NOL is generated. An improper or late election to waive the carryback period for a 2018 or 2019 NOL could result in the taxpayer being barred from carrying that NOL forward to subsequent tax years to the extent the taxpayer had taxable income in the five preceding tax years sufficient to absorb the NOL. Furthermore, if the deadline to amend the federal income tax return for any one of the five preceding tax years has passed, the taxpayer may be barred from carrying back the NOL to that tax year, and, to the extent the 2018 or 2019 NOL could have been absorbed by taxable income in that preceding tax year but the taxpayer is barred from carrying the NOL back to that year, the NOL could be lost forever.

Footnotes

1. Coronavirus Aid, Relief, and Economic Security Act, P.L. 116-136, 134 Stat. 281 (Mar. 27, 2020).

2. The NOL provisions of the CARES Act concerning straddle years (tax years beginning before January 1, 2018, and ending after December 31, 2017) are beyond the scope of this article.

3. See section 172(b)(1)(A); section 172(b)(1)(D)(i)(I).

4. See section 172(b)(3).

5. NOLs arising in 2020 are beyond the scope of this article.

6. For simplicity, this article focuses on individual taxpayers who are not subject to section 965, did not claim a foreign tax credit from 2013 to 2017, and have no farming losses. Corporate NOLs are beyond the scope of this article.

7. Assume that for all tax years, A's tax year is the calendar year and A pays her entire federal income tax liability for each tax year by no later than April 15 of the subsequent year and timely and properly files an application for an automatic extension to file her federal income tax return for each tax year.

8. The result would be the same if A had zero taxable income and a section 461(l) suspended loss of $200,000 that were determined under the tax law before the CARES Act. The CARES Act effectively suspends the application of the excess business loss provision of section 461(l) for 2018, 2019, and 2020, and the 2018 suspended loss of $200,000 should thus generally be treated as a 2018 NOL.

9. Of the $200,000 2018 NOL, $100,000 would be carried back to offset $100,000 of income in each of 2013 and 2014, thus exhausting the 2018 NOL.

10. See Notice 2020-26, 2020-18 IRB 744. The original due date for the 2018 Form 1045 was December 31, 2019, but Notice 2020-26 extends it by six months to June 30, 2020. See also IRS instructions for 2018 Form 1045, at page 1 (revised June 2020).

11. Of the $300,000 2019 NOL, $100,000 would be carried back to offset $100,000 of income in each of 2015, 2016, and 2017, thus exhausting the 2019 NOL.

12. See IRS instructions for 2019 Form 1045, at page 1 (revised June 2020).

13. See section 6511(d)(2)(A); see also infra notes 19 and 21 and accompanying text.

14. See section 172(b)(1)(D)(v)(II); section 172(b)(3); and Rev. Proc. 2020-24, 2020-18 IRB 750. Technically, A could have elected to waive the carryback period for the 2018 NOL on her 2018 timely filed (including extensions) Form 1040 under section 172(b)(3). Also, if A had filed her 2018 Form 1040 by the original due date of April 15, 2019, without making that election, she could technically still have made the election on a statement attached to a 2018 Form 1040-X filed by October 15, 2019, under reg. section 301.9100-2(b). If A missed the October 15, 2019, deadline for making the election, her last resort would be to make the election on her timely filed (including extensions) 2020 Form 1040 under section 172(b)(1)(D)(v)(II). Similarly, in order for A to elect to waive the carryback period for the 2019 NOL, she could make that election on her timely filed (including extensions) 2019 Form 1040 under section 172(b)(3), or if A filed her 2019 Form 1040 by the original due date of April 15, 2020, and did not make the election on that return, she can make the election on a statement attached to a 2019 Form 1040-X filed by October 15, 2020, under reg. section 301.9100-2(b). If A misses the October 15, 2020 deadline, her last resort would be to make the election on her timely filed (including extensions) 2020 Form 1040 under section 172(b)(1)(D)(v)(II).

15. Even assuming that reg. section 301.9100-2(b) relief is available for the deadline for the election under section 172(b)(1)(D)(v)(II) and section 172(b)(3), reg. section 301.9100-2(b) relief is not available if the original federal income tax return is filed late or if the six-month period after the due date (excluding extensions) of the original federal income tax return has expired. See reg. section 301.9100-2(b). See also CCA 201616009 (emailed Chief Counsel advice) (failure to comply with the timing requirements of the election to waive the carryback period under section 172(b)(3) is fatal to the election; the IRS has no discretion to accept a late election to waive NOL carryback period; reg. section 301.9100-3 relief by means of a private letter ruling is unavailable for a section 172(b)(3) election because that election is statutory and reg. section 301.9100-3 only applies to regulatory elections).

16. See, e.g., Young v. Commissioner, 783 F.2d 1201 (5th Cir. 1986), aff'g 83 T.C. 831 (1984) (taxpayers who made a late election to waive the carryback period were required to carry the 1976 NOL back before carrying it forward to 1977); Plumb v. Commissioner, 97 T.C. 632 (1991) (taxpayers who made an invalid election to waive carryback periods for 1984 and 1985 NOLs were required to carry back the NOLs to 1983 before carrying them forward); and Miller v. Commissioner, 99 F.3d 1042 (11th Cir. 1996), rev'g 104 T.C. 330 (1995) (taxpayers who made an invalid election to waive the carryback period for 1985 NOL were required to first carry back the NOL before carrying it forward).

17. See section 6511(a); section 7503. The deadline to amend A's 2013, 2014, 2015, 2016, and 2017 federal income tax returns would generally be October 16, 2017, October 15, 2018, October 15, 2019, October 15, 2020, and October 15, 2021, respectively.

18. See supra note 9.

19. See section 6511(d)(2)A); section 7503; and section 172(b)(1)(D)(i)(I). Generally, the deadline to file A's Form 1040-X for any tax year from 2013 through 2017 to carry back a 2018 NOL to that year would be October 17, 2022.

20. See supra note 11

21. See section 6511(d)(2)A); section 7503; and section 172(b)(1)(D)(i)(I). Generally, the deadline to file A's Form 1040-X for any tax year from 2014 to 2018 to carry back a 2019 NOL to that year would be October 16, 2023. 

22. Mitigation provisions and doctrines, such as the equitable recoupment doctrine, the mitigation provisions of sections 1311-1314, or any similar rule or law, are beyond the scope of this article. 

Originally published by Tax Notes Federal on the 28th of September, 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.