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C Corporation: CARES Act Net Operating Loss Clarification

The passage of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) provides the longest net operating loss carryback period ever seen. For losses arising in taxable years ending after December 31, 2017, and before January 1, 2021, businesses can carryback net operating losses for five years, offsetting taxable income which most likely was taxed at a higher income tax rate. For example, a net operating loss generated by a C corporation with a taxable year ending December 31, 2018 would be able to carryback the loss, and offset taxable income, starting with the taxable year ending December 31, 2013.

Also included in the CARES Act are a variety of technical corrections in relation to the last major federal tax reform, the Tax Cut Jobs Act, passed in December of 2017. A technical correction was issued in the CARES Act allowing fiscal year taxpayers who created a net operating loss in a taxable year that began in 2017 and ended during 2018 to carryback the loss.

However, clarification was needed on how both net operating loss carryback provisions provided by the CARES Act would interact for a fiscal year taxpayer that incurred a net operating loss for a taxable year beginning prior to January 1, 2018, and ending after December 31, 2017. On April 9, 2020, the IRS issued specific guidance in Rev. Proc 2020-24 which addresses such 2017 “straddle” tax years. The revenue procedure provided guidance that net operating losses that arose in a straddle year are not subject to the same carryback period as calendar year filers, or five years. Instead, the CARES Act only allows a taxpayer with a net operating loss in a 2017 straddle taxable year to carry that loss back two years.

Timing of Filing for a Refund

A 2017 straddle taxable year taxpayer may apply for a tentative refund, carrying back the net operating loss for 2 years, on Form 1139. Form 1139 must be filed no later than July 27, 2020. This deadline is exclusively available for fiscal year taxpayers who incurred a net operating loss during this straddle period. Any claims made after this deadline will require that an amended return to be filed.

C corporation taxpayers with net operating loss generated for a taxable year ending on December 31, 2018 will have until June 30, 2020 to file a Form 1139, and carryback the net operating loss for five years. Any claims made after this deadline will require that an amended return to be filed.

C corporation taxpayers who generated a net operating loss for the taxable year ending December 31, 2019, will have until December 31, 2020 to file a Form 1139 and claim a tentative refund. Fiscal year taxpayers who generated a taxable loss for the taxable year ending in 2019 must file Form 1139 within 12 months of the end of the tax year in which a net operating loss was created. Both calendar and fiscal year filers with a tax year ending in 2019 will be able to carryback the net operating loss created for five years.

The significance of filing a Form 1139 (Corporation Application for a Tentative Refund) versus a Form 1120X (Amended US Corporation Income Tax Return) is the processing of the return and timing of when the refund payment will be received. The IRS indicates that they will process a Form 1139 generally within 90 days. However, a Form 1120X can take the IRS up to 4 months to process, and even longer if the IRS has a high volume of submissions.

How to File for a Refund

The IRS recently published temporary procedures that will allow net operating loss carrybacks to be processed more quickly. Starting April 17, 2020, the IRS will accept refund claims, of up to 100 pages, to be submitted by fax. Dedicated fax numbers have been temporarily established to receive claims and will be processed in the order received. If a taxpayer previously mailed a copy of their claim after March 27, 2020, that same claim can be re-submitted via fax. This is a short-term measure to help taxpayers seek expedited refunds, therefore, time is of the essence.

Waiving the Net Operating Loss Carryback Period

The general rule requires that a net operating loss be carried back. Therefore, if the taxpayer chooses to not carryback the net operating loss generated, specific steps are required. Rev. Proc. 2020-24 clarifies that fiscal-year filers who incurred a net operating loss for taxable years ending after December 31, 2017, must file an election no later than July 27, 2020, if they choose to waive the carryback period.

Specifically, fiscal year taxpayers must incorporate the following information in the election:

  • A statement disclosing the election is “Filed Pursuant to Rev. Proc. 2020-24”.
  • Indication of the IRC Section under which the election is filed.
  • Name of such election, tax period, and explanation of the basis for making the election.

Fiscal year taxpayers whose taxable year ends in 2019, as well as 2018 and 2019 calendar year taxpayers, can waive the net operating loss carryback period by the due date, including the extension of time, for filing the taxpayer’s return for the first taxable year ending after March 27, 2020. The waving of a net operating loss carryback period is a permanent election and should only be made after serious analysis.

Please do not hesitate to reach out to our experts at Bonadio to talk about any of the CARES Act tax law changes.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We therefore make no warranties, expressed or implied, on the services provided hereunder.