When the Coronavirus Aid Relief and Economic Security (CARES) Act was enacted in March 2020, it retroactively changed net operating loss (NOL) carryback rules to pre-Tax Cuts & Jobs Act (TCJA) for tax years 2018-2020.
Problem solved, right? Unfortunately, clarity was still needed on two major issues. Farmers and ranchers needed to know if they could:
- Waive their irrevocable election to forego NOL carrybacks for 2018 and 2019. At that time, a five-year option was not available.
- Retain their two-year carryback if used in 2018 or 2019. Or would they be forced to amend and apply the five-year option, since the CARES Act temporarily removed the two-year option for years 2018-2020?
Where the rules stand now
The Consolidated Appropriations Act (CAA) provided some clarity when it was enacted in December 2020:
- Farmers and ranchers can waive a prior election to forego the two-year carryback and elect the five-year carryback for tax years 2018 and 2019.
- Farmers and ranchers can keep their two-year carryback election or claim the five-year carryback through tax year 2020.
- Both clarifications apply retroactively and are now part of Section 2303.
Example of post-CARES Act NOL carryback rules
Here’s a practical example of how the CARES Act and the Consolidated Appropriations Act (CAA) could play out for an agricultural business:
- Assume a C-Corp row crop farming operation had a large NOL on its 12/31/18 1120 return. It elected to forego the NOL carryback provision as it had no taxable income to absorb in tax years 2016 and 2017. However, it had taxable income in 2013, 2014 and 2015 that it would’ve absorbed with their 2018 NOL, but TCJA law eliminated the five-year carryback option.
- Fast forward to April 2020 (and assume 2019 prep was completed with no NOL). The C-Corp owners want their tax accountant to amend their 2018 return to take advantage of the five-year carryback option. Their accountant reminds them they made an irrevocable two-year election on the 2018 return — but also lets the owners know the election was made under old guidance. The only option in 2018 under TCJA was a two-year carryback.
- At the end of 2020, the CAA was enacted. Now, the C-Corp can go back to their 2018 return, revoke their prior election, and take their 2018 NOL back five years to absorb taxable income at a 100% offset until the NOL is used in full.
How Wipfli can help
Taxation rules change. When they do, you need to adapt your tax strategy to protect profitability and future opportunities. Wipfli’s agriculture tax professionals can help you stay on top of rules and make smart, tax-advantaged decisions. Contact us today to plan a tax strategy for your agricultural business.