CARES Act Revises NOL Rules and Opens Door For Unclaimed R&D Tax Credits

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides companies and individuals with a host of tax saving opportunities. We previously discussed the benefits that the qualified improvement property (QIP) fix provides for any taxpayers who have incurred renovation costs since 2018. This article focuses on the impacts to net operating loss (NOL) carrybacks.

For context, the 2017 Tax Cuts and Jobs Act (TCJA) previously eliminated NOL carrybacks for tax years beginning on or after January 1, 2018 to help defray the cost of reducing the corporate tax rate to 21%. But now, in times of economic hardship, the CARES Act allows taxpayers to carry back any NOL from taxable years 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 originated. Additionally, the CARES Act repealed the 80% income limitation for NOL carryovers deductible in tax years beginning before January 1, 2021.

The IRS published guidance on the NOL carryback changes via Notice 2020-26 and Rev. Proc. 2020-24. Notice 2020-26 provided extensions to file an expedited NOL carryback claim for NOLs arising in taxable years beginning in 2018 and ending on or before June 20, 2020. For 2018 calendar year NOLs, the deadline to file an expedited claim is June 30, 2020, while fiscal year taxpayers with tax years beginning prior to January 1, 2018 and ending during 2018 must file carryback claims no later than July 27, 2020. Rev. Proc. 2020-24 mainly covers procedures for 1) an optional election to waive the five year NOL carryback and 2) Section 965 repatriation tax implications. The expedited NOL carryback refund claim is completed via Form 1139 “Corporate Application for Tentative Refund” for companies and Form 1045 “Application for Tentative Refund” for individuals. In many cases, the taxpayer will not have to file an amended return to carryback an NOL from 2018 and 2019 to prior years. The IRS has 90 days to conduct a limited examination or review of the application for omissions or errors and can either allow or deny the application. The IRS also recently issued temporary procedures for faxing certain Forms 1139 and 1045 to the IRS to further expedite the review process. Additionally, the IRS has provided various FAQ’s about the carrybacks on their website.

Taxpayers that did not have an NOL in 2018 or 2019 could now have one as a result of the multitude of CARES Act changes. Taxpayers should immediately consider all avenues for generating additional NOLs in 2018 and 2019, such as 179D energy efficient building deductions, cost segregation, and QIP reclassification. Those additional NOLs could carry back and eliminate income in prior years with higher tax rates and generate significant refunds. Additionally, eliminating prior year income provides an opportunity to claim R&D tax credits and other unclaimed tax benefits from otherwise closed tax years and carry them forward to an open year where the taxpayer can use the benefit.

For instance, a taxpayer might be able to carry back large 2018 and 2019 NOLs to 2013, 2014, and subsequent prior tax years and claim significant refunds for taxes previously paid in those prior years. The taxpayer might also be able to claim previously unclaimed 2013, 2014, and subsequent year R&D tax credits without amending those tax years and carry them forward to an open tax year to further boost their immediate cash flow. This is due to a quirk in the federal statute of limitations for refund claims, which is normally 3 years from the return due date or date of filing, whichever is later. However, the taxpayer is not claiming a refund of tax paid in closed years with losses, instead carrying the credits forward, hopefully to an open year within the statute of limitations. BRAYN has not only used the NOL and R&D credit approach for countless businesses to double or even quadruple R&D tax benefits, but they have also seen full sustentions of the closed-year carryforward credits under IRS examination.

The COVID-19 legislation has opened the door for countless opportunities such as the NOL and R&D tax credit interplay described above. Reach out to your CPA and BRAYN today to make sure that you aren’t leaving money on the table when it matters most.

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