CARES Act of 2020. CPA Exam. Net Operating Loss. Interest Deduction. Qualified Improvement Property
Channel: Farhat Lectures. The # 1 CPA & Accounting Courses
Date: 2020-09-27

In this video, I discuss the Cares Act of 2020 as it applies to net operating loss (NOL).  Cares Act of 2020 including net operating loss is testable start october 2020.

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Under the Coronavirus Aid, Relief and Economic Security Act (the CARES Act), corporations, partnerships and certain other taxpayers are permitted to carryback net operating losses (NOLs)[1] up to five years from taxable years 2018, 2019 and 2020. In addition, the Internal Revenue Service (the IRS) released Revenue Procedure 2020-24 addressing how taxpayers can make various elections in connection with such NOL carrybacks. This article addresses the major issues corporations face in determining the amount of their permitted NOL carrybacks, how to claim them and how to evaluate what elections to make to maximize their NOL carryback claims. As described in more detail below, the changes made to the Code in connection with the Tax Cuts and Jobs Act (the TCJA) at the end of 2017 significantly complicate NOL carryback claims being made today.[2] The section 965 transition tax, in particular, creates challenges for taxpayers seeking to optimize their elections in making NOL carryback claims. This alert discusses how to approach NOL carrybacks to years that precede (pre-section 965 years), include (section 965 years) or follow (post-section 965 years) the section 965 transition tax years. In addition, it addresses the issues faced by corporations that may have been a member of a different consolidated group during the carryback years than the one they are in today due to having been sold or spun-off during the potential carryback period. While the possibility of carrying back NOLs for up to five years to claim a tax refund presents a great opportunity, every corporation should evaluate the benefit of making such a claim based on its own situation in order to maximize the benefit of any claim.

Background
Prior to the TCJA, a corporate taxpayer could carryback its NOLs for two years to obtain a refund and could carryforward its NOLs for 20 years to offset taxable income. To obtain a quick tentative tax refund based on a NOL carryback under the pre-TCJA carryback provisions, a corporate taxpayer needed to file an application for a tentative carryback adjustment on Form 1139 within 12 months of the close of the taxable year in which the NOL arose.[3] The TCJA changed the NOL rules by generally eliminating NOL carrybacks and allowing NOL carryforwards indefinitely. However, the TCJA limited a corporation’s ability to use NOL carryforwards generated post-2017 by only permitting NOLs to offset 80-percent of its taxable income in a given year.

Under the CARES Act, taxpayers can carryback NOLs generated in taxable years beginning after December 31, 2017 and before January 1, 2021, for up to five years. Further, the CARES Act entirely eliminates the taxable income limitation on the use of NOL carryforwards for post-TCJA taxable years through 2020. Notice 2020-26 extends the 12-month time period to file an application for a quick tentative tax refund with respect to NOLs that arose during a taxable year that began during calendar year 2018 and that ended on or before June 30, 2019 by six months. These changes are especially beneficial to corporate taxpayers because they may be able to use NOLs that arose in a post-TCJA taxable year in which the corporate tax rate was 21-percent, to obtain a refund at a 35-percent rate in a pre-TCJA taxable year.

The CARES Act offers additional benefits related to the section 965 one-time transition tax imposed under the TCJA on a U.S. shareholder’s share of the earnings and profits of a deferred foreign income corporation (DFIC). Section 965 taxed accumulated offshore earnings and profits of DFICs held in cash at a 15.5% rate and other accumulated offshore earnings and profits of DFICs at an 8% rate. Under the TCJA, U.S. shareholders of DFICs were permitted to make a section 965(n) election not to apply their NOLs to their transition tax liability. The CARES Act provides that if taxpayers carry back losses to section 965 years, they will be deemed to have made the section 965(n) election with respect to those NOL carrybacks regardless of whether they made such an election in their initial section 965 year. Additionally, The CARES Act allows taxpayers to entirely exclude or skip years that are section 965 years from the five-year NOL carryback period, potentially increasing the amount of the available refund.