By: Peter Beach
June 17, 2020
As discussed in a previous Alert, the CARES Act provides for a carryback of any Net Operating Loss (“NOL”) arising in a tax year beginning after December 31, 2017, and before January 1, 2021, to each of the five tax years preceding the tax year in which the loss arises (the “carryback period”). A taxpayer entitled to a carryback period can make an irrevocable election to relinquish the carryback period for an NOL for any tax year.
An election to waive the carryback for NOLs arising in tax years beginning in 2018 or 2019 must be made no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the first tax year ending after March 27, 2020. A taxpayer makes the election by attaching to that federal income tax return filed a separate statement for each of the tax years 2018 or 2019 for which the taxpayer intends to make the election. The election statement must state that the taxpayer is electing to apply Section 172(b)(3) under Rev. Proc. 2020-24 and the tax year for which the statement applies.
The CARES Act did not provide additional time to file tentative carryback adjustment applications for NOLs arising in a tax year beginning on or after January 1, 2018, and ending before March 27, 2019, even though the time to file those applications had expired when it was enacted. Taxpayers with losses in these tax years that may now be carried back to an earlier tax year will generally be able to file amended returns to claim refunds or credits resulting from the change in the law. These taxpayers, however, would not be able to take advantage of the expedited tentative carryback adjustment procedure without an extension of time.
However, the IRS has granted a six-month extension of time to file the appropriate forms (Form 1045 or Form 1139) for taxpayers that have an NOL that arose in a tax year that began during calendar year 2018 and that ended on or before June 30, 2019. This extension of time is limited to requesting a tentative refund to carry back an NOL and does not extend the time to carry back any other item.
To take advantage of this extension, taxpayers must file the appropriate form no later than 18 months after the close of the tax year in which the NOL arose (i.e., no later than June 30, 2020, for a tax year ending December 31, 2018); and include at the top of the form “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”
Finally, note that neither New Hampshire nor Massachusetts conform to these changes. New Hampshire applies its own limitations to NOLs (as determined for federal tax purposes) under the BPT, and conforms to the changes effective as of December 31, 2018, effectively ignoring any changes under the CARES Act. The Massachusetts corporate excise tax does not conform to the federal NOL rules and the Massachusetts personal income tax does not allow NOL deductions at all.