Claiming an NOL Carryback Under the CARES Act
The CARES Act provided a temporary path for businesses to convert recent net operating losses into expedited cash refunds from prior tax years.
A net operating loss (NOL) occurs when a business’s allowable tax deductions exceed its taxable income for a given year. This loss can then be used to offset taxable income in other years, reducing the overall tax burden.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 created a temporary change in how businesses could utilize NOLs. This legislation provided a window for companies to revisit prior tax years and obtain refunds.
CARES Act NOL Carryback Rules
Prior to the CARES Act, the Tax Cuts and Jobs Act of 2017 (TCJA) had eliminated the option for most businesses to carry back NOLs. Instead, losses could only be carried forward to offset up to 80% of taxable income in future years. The CARES Act temporarily suspended these TCJA rules, allowing taxpayers with NOLs arising in tax years 2018, 2019, or 2020 to carry those losses back five years. For example, a 2019 loss could be applied against taxable income from as far back as 2014, generating a potential refund.
This five-year carryback was available to corporations and individuals who report business losses on their personal tax returns. However, Real Estate Investment Trusts (REITs) were not permitted to carry back an NOL. The law required that the loss be carried back to the earliest year in the five-year period first. If the NOL was not fully used, the remainder would be carried to the next succeeding year until the loss was fully absorbed.
Taxpayers could also waive the carryback period and only carry the losses forward, though this election was irrevocable. With the expiration of the CARES Act provisions, NOLs arising in tax years 2021 and later generally cannot be carried back. Instead, they can be carried forward indefinitely to offset up to 80% of taxable income in future years.
Required Information and Forms for Claiming the Carryback
To claim a refund from an NOL carryback, a taxpayer needed the finalized federal income tax return for the loss year (2018, 2019, or 2020) showing the calculated NOL. They also needed complete tax returns for the five preceding years to which the loss would be applied.
The primary forms for claiming an expedited refund were Form 1139 for corporations and Form 1045 for individuals, estates, and trusts. These forms were used to apply for a “tentative refund,” a faster method than filing a traditional amended return. As an alternative, a taxpayer could file Form 1120-X for a corporation or Form 1040-X for an individual for each of the carryback years, though this process was slower.
When completing Form 1139 or 1045, the taxpayer had to enter the NOL amount and provide a computation for each adjusted carryback year. This calculation showed the original taxable income, the application of the NOL deduction, and the new, lower tax liability. A detailed computation showing how the NOL was calculated and applied was a required attachment.
Filing for a Tentative Refund
Applications for a tentative refund had to be filed separately from any other tax return and mailed to a specific IRS service center for expedited review. The tentative refund procedure was designed for quick relief, as the IRS was required to review the application and issue a refund within 90 days of a complete filing. This 90-day timeline was a significant advantage over filing an amended return, which could often take six months or more to process.
These provisions were temporary, and the deadlines for making these claims have passed. The window to file for an expedited tentative refund has closed, and the general three-year deadline to claim a refund by filing an amended return has also expired for losses from the 2018-2020 period.
Interaction with Other Tax Provisions
The CARES Act NOL carryback rules had specific interactions with other parts of the tax code. The Act prohibited using an NOL carryback to offset income from the one-time repatriation tax under Section 965. A loss could be carried back to a year that included this tax, but it could only reduce other sources of income.
Another interaction was with the corporate Alternative Minimum Tax (AMT), which the TCJA had repealed for tax years after 2017. Because the CARES Act allowed a five-year carryback, losses from 2018-2020 could be applied to years when the AMT was still in effect. This allowed a taxpayer to reduce a prior year’s AMT liability and generate a refund of AMT paid.