To Carry Back, or Not to Carry Back, That is the Question

In an effort to provide liquidity to taxpayers, as part of the CARES Act, Congress has enabled taxpayers to carry back a net operating loss (NOL) arising in a taxable year beginning after December 31, 2017, and before January 1, 2021 for five taxable years, and made other changes to the Internal Revenue Code which may allow taxpayers to increase their NOLs for those years.  However, there is no cookie-cutter answer to the question whether taxpayers should take advantage of some of these law changes, including the ability to carry back NOLs. In this alert, we discuss:

• The rules governing NOLs prior to TCJA and the related changes that TCJA made,
• The NOL provisions within the CARES Act,
• What a taxpayer should consider in determining whether to carry back its NOLs, and
• If it chooses to carry back its NOLs, the mechanics and anticipated timing of a refund.

NOL Provisions Pre-TCJA and the Related TCJA Changes

Prior to the passage of the TCJA, taxpayers were required to compute a regular tax NOL applying regular Code rules and an Alternative Minimum Tax (AMT) NOL applying the AMT rules.  Both the regular tax NOL and the AMT NOL could be carried back two years and carried forward 20 years.  A taxpayer was able to offset all of its regular taxable income in a given year with a net operating loss deduction. However, generally only 90% of the taxpayer’s alternative minimum taxable income (AMTI) could be offset by the AMT NOL.

The TCJA made the following notable changes to the rules governing NOLs generated after December 31, 2017:

• Taxpayers are generally no longer able to carry back their NOLs.
• The carryforward period for NOLs is indefinite.
• A taxpayer is able to offset only 80% of its taxable income in a given year with NOL deductions.

In an apparent oversight, the carryback provision was made effective for taxable years ending after December 31, 2017, while the 80% limitation was made effective for taxable years beginning after December 31, 2017.

Additionally, the TCJA made two notable changes with respect to the application of the AMT to corporations:

• Corporations are no longer required to pay AMT.
• The credit for AMT previously paid (minimum tax credit or MTC) was made refundable over a four-year period from 2018 through 2021.

Summary of CARES Act NOL Provisions

With respect to NOLs, the CARES Act made two substantial changes for taxable years beginning after December 31, 2017, and before January 1, 2021:

• Any NOL deduction taken in those years is not subject to the 80% taxable income limitation discussed above, and
• Taxpayers can carry back NOLs arising in those taxable years for five taxable years (although they can forgo the entire carryback period).

The CARES Act also provides that an NOL carryback cannot be used to offset the Section 965(a) toll charge, and the taxpayer can choose to exclude the year or years in which it reported the Section 965(a) toll charge from the carryback period, without having to forgo the carryback altogether. However, excluding those years does not extend the carryback period.

Additionally, the CARES Act included a technical correction to the effective date of the TCJA provisions, so that an NOL that was generated in a fiscal year that began before December 31, 2017 and ended after December 31, 2017 can be carried back two years under pre-TCJA rules…

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