The IRS has clarified procedures for taxpayers that want to elect out of the new net operating loss carryback rules and extended the time for some taxpayers seeking a tentative carryback adjustment.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) temporarily requires taxpayers to carry back losses arising in tax years from 2018 through 2020 for up to five years unless they elect to waive or reduce the carryback period.
In Rev. Proc. 2020-24, 2020-17 IRB 1, issued April 9, the IRS describes how taxpayers waive an NOL carryback under section 172(b)(3) for tax years beginning after December 31, 2017, and before January 1, 2021.
The revenue procedure also provides guidance on elections under the CARES Act special rule for tax years beginning before January 1, 2018, and ending after December 31, 2017. Under that rule taxpayers can elect to waive or reduce a carryback period or revoke an election to waive a carryback period.
The IRS said in Notice 2020-26, 2020-18 IRB 1, that it is granting a six-month extension to file applications for a tentative carryback adjustment under section 6411 for NOLs that arose in tax years that began in calendar year 2018 and that ended on or before June 30, 2019.
Individuals, trusts, and estates would file Form 1045, “Application for Tentative Refund,” and corporations would file Form 1139, “Corporation Application for Tentative Refund.”
Deemed Repatriations
For multinational businesses with deemed repatriation income in prior years, Rev. Proc. 2020-24 provides additional guidance concerning two special rules in the CARES Act for companies that carry back NOLs to a section 965 inclusion year.
The Tax Cuts and Jobs Act imposes a one-time transition tax — 15.5 percent for cash positions and 8 percent for other amounts — on U.S. shareholders’ share of a specified 10 percent-owned foreign corporation’s deferred earnings and profits.
Under section 965(h), taxpayers may elect to pay their transition tax liability in eight annual installments: 8 percent of the liability for the first five installments, 15 percent for the sixth installment, 20 percent for the seventh, and 25 percent for the eighth.
Companies may make a section 965(n) election not to apply their NOL deduction to their transition tax liability, and instead, for example, apply foreign tax credits that they might otherwise be unable to use.
The CARES Act’s NOL provision states that if taxpayers carry back losses to a tax year that includes section 965 income, they will be deemed to have made the section 965(n) election for that year. Thus, taxpayers won’t be allowed to apply their NOL deduction to offset their transition tax liability.
The second rule states that if taxpayers carry back NOLs to one or more tax years that are section 965 inclusion years, they may — “in lieu of the election otherwise available” to waive NOL carrybacks under section 172(b)(3) — elect to exclude all such tax years from the five-year carryback period.
The guidance explains how companies waive or exclude section 965 years from carryback.