In response to unprecedented economic disruption of the U.S. economy, the Coronavirus Aid, Relief and Economic Security (CARES) Act, was signed into law on March 27, 2020. The Act includes a significant number of tax and other provisions designed to support businesses impacted by the coronavirus pandemic, notably measures to provide cash flow support at a time when commercial revenue generation has all but ceased.
Several of the Act’s provisions provide insurance companies opportunities to access much needed cash on an accelerated basis through the use of certain tax attributes, namely existing and current Net Operating Losses (NOLs). In some cases, the benefit will be available currently, while in others the benefit becomes available when taxpayers have filed their 2019 and/or 2020 business tax returns.
As in the case of most new legislation, the provisions of the CARES Act allowing insurance companies to file refund claims has raised a host of technical and procedural issues. In the two weeks since enactment, many taxpayers have modeled the potential economic, accounting and cash impact of the new rules, but have been unable to file refund claims awaiting IRS guidance.
On April 9, 2020, the IRS issued administrative and procedural guidance for taxpayers in the form of Revenue Procedure 2020-24 and Notice 2020-26. This article discusses the provisions of Notice 2020-26 and will be followed by a second article focused on Revenue Procedure 2020-24.
The notice provides important relief for certain taxpayers to allow them to take advantage of the relaxed rules made to the NOL provisions set forth in the CARES Act. Specifically, the notice extends the deadline for filing an application for a tentative carryback adjustment under § 6411 of the Internal Revenue Code (IRC) with respect to the carryback of an NOL that arose in any taxable year that began during calendar year 2018 and that ended on or before June 30, 2019.
The CARES Act amends § 172(b)(1) to carry back any NOL arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021, to each of the five taxable years preceding the taxable year in which the NOL arises (carryback period). As a result of that amendment, taxpayers consider such NOLs in the earliest taxable year in the carryback period, carrying forward unused amounts to each succeeding taxable year. Further, the CARES Act allows a deduction for a taxable year beginning before Jan. 1, 2021, in an amount equal to the aggregate of the NOL carryovers and carrybacks to such year.
The CARES Act also allows certain taxpayers to accelerate the recovery of 100 percent of any remaining minimum tax credits of a corporation in its taxable year beginning in 2019, as opposed to its taxable year beginning in 2021. The CARES Act added § 53(e)(5) to the IRC to permit a corporation to elect instead to recover 100 percent of any of its remaining minimum tax credits in its taxable year beginning in 2018.
Under law in effect prior to the enactment of the CARES Act, the IRC allowed a taxpayer to file an application for a tentative carryback adjustment of the tax liability for a prior taxable year that was impacted by an NOL carryback or by other carrybacks, namely tax credits. Under § 1.6411-1(b)(1) of the Income Tax Regulations, taxpayers that are corporations must make the application on Form 1139, Corporation Application for Tentative Refund, and taxpayers other than corporations must make the application on Form 1045, Application for Tentative Refund. The Code and regulations require that an application must be filed within 12 months of the close of the taxable year in which the NOL arose. The tentative carryback adjustment procedure allows a taxpayer to obtain a quick tentative tax refund based on an NOL carryback. Once the application is filed, the IRS typically conducts a limited examination of the application and makes the resulting credit or refund within 90 days of the filing of the application.
Minimum Tax Credits under Notice 2020-26
If a taxpayer elects to recover 100 percent of any of its remaining minimum tax credits in its taxable year beginning in 2018, the CARES Act permits a corporation to file an application for a tentative refund of any amount for which a refund with respect to its taxable year beginning in 2018 is due.
Such application is to be treated and processed as an application made under § 6411 IRC, provided the application is filed prior to Dec. 31, 2020.
NOLs under Notice 2020-26
The CARES Act did not provide additional time to file tentative carryback adjustment applications with respect to NOLs arising in a taxable year beginning on or after Jan. 1, 2018, and ending before March 27, 2019, even though the time to file those applications had expired as of the date of enactment. Taxpayers whose losses in these taxable years may now be carried back to an earlier taxable year due to the CARES Act will generally be able to file amended returns to claim refunds or credits resulting from the change in the law. However, these taxpayers would not be able to take advantage of the expedited § 6411 tentative carryback adjustment procedure without an extension of time to file Form 1139 or Form 1045.
The importance of this result is the speed with which the IRS responds to amended returns. In general, there can be a significant lag in the receipt of cash refunds when accessed through an amended return as opposed to the expedited tentative carryback adjustment.
Section 6081 IRC provides that the Secretary of the Treasury or his delegate may grant a reasonable extension of time (generally not to exceed six months) for filing any return, declaration, statement or other document. Under this authority, the Department of the Treasury and the IRS are granting a six-month extension of time to file Form 1045 or Form 1139, as applicable, to taxpayers that have an NOL that arose in a taxable 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.
The Notice provides the following example to assist taxpayers in determining the correct procedural course of action under the new guidance:
“In the case of an NOL that arose in a taxable year ending on December 31, 2018, a taxpayer normally would have until December 31, 2019, to file the Form 1045 or Form 1139, as applicable, but due to this relief, will now have until June 30, 2020, to file the Form 1045 or Form 1139, as applicable. For this same taxpayer, if the taxpayer is a corporation, the deadline to claim a minimum tax credit described in § 53(e)(5) is December 30, 2020, but in order to file one application for a tentative refund and claim both the NOL carryback and the minimum tax credit at the same time, the taxpayer must do so by the earlier of the two deadlines.”
Finally, to take advantage of the extension of time for requesting a tentative refund based on an NOL carryback, the taxpayer must perform the following actions: (a) File the applicable form no later than 18 months after the close of the taxable year in which the NOL arose (that is, no later than June 30, 2020, for a taxable year ending Dec. 31, 2018); and (b) Include on the top of the applicable form “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”
In summary, the IRS has now provided much anticipated and favorable guidance with respect to refund opportunities under the CARES Act. Affected taxpayers should immediately begin the process of completing and filing the tentative carryback adjustment claims.
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