Special Tax Alert
The IRS has released additional guidance in Notice 2020-26 and Rev. Proc. 2020-24 regarding the provisions of the CARES Act, allowing net operating losses (NOLs) to be carried back to earlier years. The new guidance continues the policy evident in other recent IRS pronouncements of removing impediments to obtaining refunds quickly, within the limitations imposed by law.
Notice 2020-26 grants taxpayers an extension of time to file an application on Form 1139 (for corporations) or 1045 (for individuals) for a tentative carryback adjustment (expedited refund) due to an NOL that can be carried back from a taxable year beginning in 2018. In general, IRC § 6411 allows these applications but requires them to be filed within 12 months of the close of the taxable year of the loss. As a result, the time for filing the application for a loss arising in calendar 2018 expired at the end of 2019. An expedited refund is important because the alternative is to file an amended return for the affected year or years, which requires significantly longer to process. Expedited refund applications are typically processed within 45-90 days. A refund claim on an amended return, by contrast, must be fully reviewed by the IRS (and in some cases go through lengthy Joint Committee on Taxation review procedures) before the refund can be issued.
Notice 2020-26 extends by six months the time for filing an expedited refund application on Form 1139 for an NOL carryback arising in a taxable year beginning in 2018 and ending on or before June 30, 2019. For example, a calendar year corporation can file Form 1139 to carry back its NOL from 2018 by June 30, 2020. The application must be mailed to the IRS Service Center, which in light of current events creates a risk of processing delays. But the sooner the application is filed, the sooner the IRS can begin working on it, as these claims are processed on a “first-come, first-served” basis.
The Notice points out that the CARES Act allows an application for an expedited refund of remaining AMT credits to be filed by December 31, 2020. However, the Notice notes that the applications for expedited refunds attributable to NOL carrybacks and AMT credits can be filed simultaneously. Form 1139 should be marked at the top, “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”
Rev. Proc. 2020-24
Rev. Proc. 2020-24 describes the procedures for taking certain actions under the CARES Act and related prior guidance. Certain actions must be taken by the due date (including extensions) of the tax return for the taxpayer’s first taxable year ending after March 27, 2020, the date of enactment of the CARES Act. The Rev. Proc. also provides useful guidance regarding the carryback of NOLs to the year or years in which the taxpayer reported an income inclusion under § 965(a) (the repatriation toll charge).
A taxpayer may choose not to carry back an NOL from a year, even though the carryback is authorized by the CARES Act. To do so, the taxpayer must attach a statement to its tax return for the first taxable year ending after March 27, 2020, for each year (2018 or 2019) for which the carryback is waived. The election statement must state that the taxpayer is electing to apply § 172(b)(3) under Rev. Proc. 2020-24 and the taxable year for which the statement applies. This election is irrevocable…