What Is Form 1138 and How Is It Used?
Learn how Form 1138 allows a corporation to postpone a prior year's tax payment when it anticipates a Net Operating Loss in the current year.
Corporations anticipating a financial downturn can use IRS Form 1138, Extension of Time for Payment of Taxes by a Corporation Expecting a Net Operating Loss Carryback. This form allows a company to postpone paying income tax for the preceding year based on a projected Net Operating Loss (NOL) in the current year. Its function is to align the prior year’s tax payment with the expected refund from the NOL, preventing the need to pay taxes that will likely be returned.
Determining Eligibility to File
To use Form 1138, a business must meet specific criteria. The primary requirement is that the filer must be a corporation, as individuals, sole proprietorships, and most partnerships cannot use this form. The corporation must also reasonably expect to incur an NOL for the current tax year based on concrete facts and circumstances.
The use of Form 1138 is now rare. Federal tax law eliminated the option for most businesses to carry back an NOL to prior tax years, requiring them to be carried forward to reduce future taxable income instead. An exception exists for certain businesses, like farming operations, which may still be eligible for a two-year carryback, making them the primary users of this form.
Information and Calculations for Form 1138
Preparing Form 1138 requires specific financial data and calculations. First, the corporation must determine the total tax liability for the preceding tax year from its filed income tax return. This figure includes the total tax shown on the return plus any amounts later assessed as a deficiency, interest, or penalty, and it establishes the baseline for the extension.
Next, the corporation must estimate the NOL for the current tax year by projecting its annual gross income and total deductions. A detailed explanation for the expected loss must be provided on the form. After estimating the NOL, the corporation calculates the expected overpayment from carrying this loss back. The amount of tax payment that can be extended cannot exceed this expected overpayment.
On the form, the corporation will enter key information, including the estimated NOL and the ending date of the tax year for the extension. A calculation then subtracts any tax amounts already paid for the prior year from the total tax liability. This determines the remaining unpaid amount eligible for extension, which is the maximum amount of tax for which payment can be postponed.
Filing the Form and Post-Filing Procedures
A corporation must file Form 1138 within a specific window. The form should be submitted after the start of the tax year in which the NOL is expected but before the tax for the preceding year is due. For instance, a calendar-year corporation expecting an NOL in 2025 would need to file Form 1138 before the due date for its 2024 tax payment.
The extension period ends on the last day of the month in which the tax return for the NOL year is due, including any extensions. However, the extension can be terminated earlier if the corporation files Form 1139, Corporation Application for Tentative Refund. This form is used to claim a quick refund from the NOL carryback, replacing the need for the payment extension.
Filing Form 1138 only postpones the tax payment due date and does not eliminate the liability. The IRS charges interest on the deferred amount, calculated from the original payment due date until the tax is paid. Penalties may also apply if the actual NOL is less than anticipated or if the corporation’s estimate was not reasonable.