IRS Releases CARES Act Guidance Relating to Net Operating Losses and Partnerships

Net Operating Loss Carrybacks. In Revenue Procedure 2020-24, the IRS provides guidance regarding three separate elections relating to the carryback of NOLs permitted as a result of changes made by the CARES Act.

Election to waive carryback period for taxable years beginning in 2018 or 2019. The CARES Act modified Section 172 of the Internal Revenue Code (the Code) to permit the carryback of NOLs arising in taxable years beginning in 2018, 2019 or 2020 to each of the five taxable years preceding the loss year. Absent an election to waive the carryback, an NOL arising in any of the relevant taxable years must be carried back before it is carried forward. For NOLs arising in taxable years beginning in 2018 or 2019, Rev. Proc. 2020-24 provides that a taxpayer can make the carryback waiver election by attaching a statement for each of the taxable years for which the election is being made to the taxpayer’s timely filed (taking into account extensions) tax return for the first taxable year ending after March 27, 2020.

Election to waive carryback to taxable years with inclusions under Section 965 of the Code. As part of the 2017 tax reform legislation, Section 965 was added to the Code, which required United States shareholders of controlled foreign corporations to recognize certain previously untaxed income of those corporations in the last taxable year beginning before 2018. The CARES Act includes a provision allowing taxpayers to make a special election to waive the carryback of NOLs only with respect to taxable years in which it recognized amounts under Section 965 of the Code. (In all other cases, a carryback waiver election applies to all years in the carryback period.) For NOLs arising in taxable years beginning in 2018 or 2019, Rev. Proc. 2020-24 provides that a taxpayer must make the special Section 965 carryback waiver election no later than the due date (with extensions) for filing the taxpayer’s tax return for the first taxable year ending after March 27, 2020. It does so by including a statement on the earliest filed tax return reflecting either the NOL to which the election relates or the carryback thereof. For NOLs arising in taxable years beginning during 2020, Rev. Proc. 2020-24 provides that the special Section 965 carryback waiver election must be made in the same manner by the due date (including extensions) for filing the tax return for the taxable year in which the NOL arises.

Carryback of NOLs relating to taxable years straddling 2017 and 2018. The CARES Act clarifies that NOLs arising in taxable years beginning before and ending after January 1, 2018, are eligible to be carried back under the rules that applied prior to the 2017 tax reform legislation (which generally permitted a two-year carryback). Rev. Proc. 2020-24 provides that taxpayers with NOLs in periods that straddle 2017 and 2018 can file a tentative application for refund through July 27, 2020, notwithstanding that the normal deadline for filing such an application would have already passed. Similarly, the IRS announced in Notice 2020-26 that it will grant a six-month extension to the deadline for filing tentative applications for refunds attributable to the carryback of NOLs arising in taxable years beginning during the 2018 calendar year and ending on or before June 30, 2019.

Partnership Access to Benefits of CARES Act. On April 8, 2020, the IRS released Revenue Procedure 2020-23, which generally permits partnerships that previously filed tax returns for taxable years beginning in 2018 or 2019 to file amended returns for those years that reflect tax changes resulting from the CARES Act as well as other attributes to which the partnership is entitled by law. Under the partnership audit rules adopted as part of the Bipartisan Budget Act of 2015, partnerships generally are prohibited from filing amended tax returns without the permission of the Secretary of the Treasury or his delegate. Rev. Proc. 2020-23 serves to provide that permission.