What Is the NOL Carryback Statute of Limitations?

A net operating loss (NOL) occurs when a business’s allowable tax deductions exceed its taxable income for the year. This results in a negative taxable income, meaning no tax is owed. Tax rules permit businesses to use this loss to offset taxable income from other years, which can generate a tax refund. One method for this is the NOL carryback, where the loss is applied to a prior, profitable year to recoup previously paid taxes. The opportunity to file for a carryback is governed by a strict statute of limitations, making timely action a requirement.

Determining Eligibility for a Carryback

For most businesses, the ability to carry back a net operating loss was eliminated for tax years beginning after December 31, 2020. The general rule is that NOLs must be carried forward to offset future income. However, the option to carry back an NOL still exists for a few specific types of businesses, including farming businesses and non-life insurance companies.

For losses arising in tax years after 2020, farming losses may be carried back two years and carried forward indefinitely. For non-life insurance companies, NOLs can be carried back two years and carried forward 20 years. The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced a temporary five-year carryback period for NOLs arising in tax years 2018, 2019, and 2020, but this provision has now expired.

Required Forms and Filing Deadlines

For businesses eligible to claim a refund from an NOL carryback, there are two primary methods, each with a different deadline. The first and faster method is to apply for a tentative refund using Form 1045 for individuals, estates, and trusts, or Form 1139 for C corporations. These forms are designed for an expedited review, with the IRS aiming to process the request within 90 days. An application for a tentative refund must be filed within 12 months after the end of the tax year in which the NOL occurred.

The second method is to file a standard refund claim by amending the tax return for the year to which the loss is being carried back. This is done by filing Form 1040-X or Form 1120-X. This method has a longer deadline; the claim must be filed within three years of the due date, including extensions, of the return for the year the NOL occurred. This process is slower, as amended returns can take six months or longer for the IRS to process.

Regardless of the method chosen, the taxpayer must attach detailed computations supporting the NOL and the resulting refund claim. This includes a statement showing the calculation of the NOL and how it was applied to the carryback year.

The Filing Process for an NOL Carryback

Once the appropriate forms for an NOL carryback claim are completed, the next step is proper submission to the IRS. The mailing address for these claims depends on the form being filed. Tentative refund applications, Forms 1045 and 1139, are sent to a specific IRS service center designated to handle these expedited claims, and the correct address can be found in the instructions for each form. These addresses are often different from the locations where standard tax returns are sent.

Amended returns like Form 1040-X and Form 1120-X are mailed to the IRS service center that processes the taxpayer’s returns, with the specific address again detailed in the form’s instructions. After submission, the timeline for a response from the IRS varies between the two filing methods. For a tentative refund claim, the IRS is required to review the application and issue a refund within 90 days of receiving a complete filing. If the claim is approved, the IRS will issue the refund. For a claim filed via an amended return, the processing time is much longer, often exceeding six months.