When the Coronavirus Aid Relief and Economic Security (CARES) Act was enacted on March 27, 2020, it retroactively changed net operating loss (NOL) carryback rules back to pre-Tax Cuts & Jobs Act (TCJA) for tax years 2018-2020.
Problem solved, right? Unfortunately, clarity was still needed on two major issues for farmers and ranchers:
- Could a farmer waive their irrevocable election to forego a NOL carryback if made in 2018 or 2019 since the election was only for a two-year carryback as a five-year option was not available?
- Can the farmer keep their two-year carryback if used in 2018 or 2019 or do they have 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
Upon the enaction of Consolidated Appropriations Act on December 27, 2020, farmers and ranchers got some clarity on their NOL questions:
- Farmers and ranchers can now waive a prior election to forego the two-year carryback and elect into a five-year carryback for tax years 2018 and 2019.
- In addition, farmers and ranchers now have the option to retain their two-year carryback election or claim the five-year carryback under the CARES Act provisions through tax year 2020.
- Both clarifications apply retroactively to the inception of the CARES Act and are now part of Section 2303.
This example illustrates the impact of both the CARES and Consolidated Appropriations acts:
A row crop farming operation (assume C-Corp for example) had a large NOL on its 12/31/18 1120 return. They elected to forego the NOL carryback provision as they had no taxable income to absorb in tax years 2016 and 2017. However, they did have taxable income in 2013, 2014 and 2015 they would’ve absorbed with their 2018 NOL, but TCJA law eliminated the five-year carryback option.
Fast forward to April of 2020 (assume 2019 prep was completed with no NOL), the C-Corp. owners notice the CARES Act updates to the NOL rules and 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 election on the 2018 return to forego the NOL carryback provision but also let the owners know they understood the election was made under old guidance as the only option in 2018 under TCJA was a two-year carryback.
During the summer and fall of 2020, the IRS held firm on their position that the election was irrevocable, but the tax accountant stayed patient and got a welcome surprise at the end of 2020 with the enactment of the CAA. The C-Corp. can now go back to their 2018 return, revoke their prior election, and take their 2018 NOL back five-years to absorb taxable income in those years at a 100% offset until the NOL is used in full.
How can Wipfli help
As we dive further into 2021, we’ll dig for these answers:
- What forms or process should the taxpayer use to apply the Consolidated Appropriations Act guidance on beneficial NOL opportunities?
- What are the expected timing deadlines?
- Will new stimulus legislation potentially impact NOL carrybacks either retroactively or prospectively once more?
Wipfli’s ag tax professionals will watch closely for further guidance and can help you determine the best tax strategies for your situation. Contact us today or learn more with these resources: