Net Operating Loss Five-Year Carryback

IR-2020-67, April 9, 2020

WASHINGTON - The Internal Revenue Service today issued guidance providing tax relief under the CARES Act for taxpayers with net operating losses. Recently the IRS issued tax relief for partnerships filing amended returns.

COVID Relief for taxpayers claiming NOLs
Revenue Procedure 2020-24 PDF provides guidance to taxpayers with net operating losses that are carried back under the CARES Act by providing procedures for: waiving the carryback period in the case of a net operating loss arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021, disregarding certain amounts of foreign income subject to transition tax that would normally have been included as income during the five-year carryback period, and waiving a carryback period, reducing a carryback period, or revoking an election to waive a carryback period for a taxable year that began before Jan. 1, 2018, and ended after Dec. 31, 2017.

A net operating loss (NOL) is a loss that can be used to offset income from another tax year. Normally the loss is carried back two years unless an election to forego the Carryback period is made on the tax return for the year of the loss. Any loss not used is carried forward to the following year and continues to be carried forward until it is used up. A net operating loss may be carried forward a maximum of 20 years after the NOL year.

There are exceptions to the 2 year Carryback period. For 2008, small businesses (gross receipts under $15 million) may Carryback a NOL 3, 4, or 5 years. The Worker Homeowner and Business Assistance Act expanded this 5 year Carryback period to include all taxpayers (not just a small business taxpayer). Under this new law, the amount of an NOL that may be carried back to the fifth taxable year preceding the NOL year is limited to 50% of taxable income for such taxable year).

Generally, a taxpayer may elect the 3, 4, or 5 year Carryback period for only one taxable. However, an eligible small business that timely made an election to carry a 2008 NOL back 3, 4, or 5 years may also make an election to carry a 2009 NOL back 3, 4, or 5 years.

If an eligible small business did not timely elect to Carryback its applicable 2008 NOL 3, 4 or 5 years under prior law, the taxpayer may still elect to make such an elction subject to the new law rules such as the 50% of taxable income limitation for the 5th taxable year preceding the loss year.

The NOL Carryback/Carryforward Chart summarizes these rules.