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October 16, 2020

Final consolidated net operating loss regulations provide welcome guidance on post-2020 insurance, farming, and SRLY determinations and limitations

In final regulations under IRC Section 1502 (TD 9927), Treasury and the IRS implement changes to IRC Section 172 under the Tax Cuts and Jobs Act and CARES Act on the absorption by a US federal consolidated group of net operating loss (NOL) and consolidated net operating loss (CNOL) carryovers and carrybacks.

The final regulations implement the changes to IRC Section 172 as they apply to consolidated groups by:

  • Describing how to determine the 80% limitation on absorption of NOL and CNOL carryovers (80% limitation) by a "mixed" group (i.e., a consolidated group composed of nonlife insurance companies and other members)
  • Addressing the calculation and allocation of farming losses generated by a consolidated group (which are eligible to be carried back two years)
  • Implementing the 80% limitation to determine the absorption of NOLs that are carried from periods in which the attributable member was not part of the consolidated group and subject to limitation by the separate return limitation year (SRLY) rules
  • Incorporating several changes to Treas. Reg. Section 1.1504-47, which provides updates to older regulation rules for life-nonlife consolidated groups to reflect intervening changes to the Code

The final regulations generally adopt, with few significant changes, the proposed regulations (temporary regulations addressing "split waiver" elections, which were published at the same time as the proposed regulations, will be addressed in a subsequent regulation package). The final regulations apply to tax years beginning in 2021, but the provisions related to the Treas. Reg. Section 1.1504-47 changes can be applied to prior tax years if they are applied consistently.


The CARES Act amended IRC Section 172 to allow NOLs arising in tax years beginning after December 31, 2017, and before January 1, 2021, to be carried back to each of the five tax years preceding the tax year in which the NOL arose. No carryback had generally been permitted for NOLs generated after enactment of the TCJA, although they could be carried forward indefinitely (before the TCJA, NOLs could be carried back two years and carried forward 20 years). The CARES Act also temporarily removed the 80% limitation, allowing companies to offset 100% of their taxable income with NOLs until tax years beginning after 2020.

The 80% limitation does not apply to pre-TCJA NOLs and CNOLs. It also does not apply to insurance companies other than life insurance companies. Thus, nonlife insurance companies may offset 100% of their taxable income with NOL deductions. Beginning January 1, 2021, nonlife insurance companies may continue to carry NOLs back (two years) and forward 20 years.

In July 2020, the IRS and Treasury released proposed regulations on applying the 80% limitation to "mixed" consolidated groups containing one or more nonlife insurance company members and one or more life insurance and/or non-insurance company members (see Tax Alert 2020-1775).

Final regulations

For tax years beginning after 2020, the final regulations adopted the proposed regulations by applying the 80% limitation based on the status of the entity whose income is offset by the NOL or CNOL, rather than the status of the entity whose NOL or CNOL is being absorbed. As a result, the amount of an NOL or CNOL absorbed in a consolidated return year beginning after 2020 depends on the extent to which the income-producing member is subject to the 80% limitation. This approach was uniformly approved by the seven commentators on the proposed regulations, the IRS said in the Preamble to the final regulations.

Application to a consolidated group with and without nonlife insurance members

For tax years beginning after December 31, 2020, the general rule for determining the NOL deduction under IRC Section 172 consists of two steps: first, deducting pre-2018 NOLs without limit; second, deducting post-2017 NOLs up to the 80% limit (which is computed after deducting pre-2018 NOLs, but otherwise without regard to the deductions under IRC Sections 172, 199A and 250).

For a consolidated group with only nonlife insurance companies, the 80% limitation does not apply. For a consolidated group with no nonlife insurance companies, the 80% limitation applies to all income of the group for that year.

For a "mixed" consolidated group, composed of both nonlife insurance members and other members (including life insurance members), the limit on using a post-2017 CNOL within the group is based on the aggregate of amounts from two different "pools": (i) a residual income pool (generally comprised of income of members that are not nonlife insurance companies); and (ii) a nonlife insurance income pool (generally comprised of income of members that are nonlife insurance companies). Such "pooling" could require separate calculations of consolidated taxable income for the subgroups that compose the separate pools (the combined amount of which may not equal the consolidated group's overall CTI in all cases).

One 80% limitation scenario described in the Preamble as "straightforward" involves a consolidated return year (e.g., 2021) to which no pre-2018 NOLs or CNOLs are being carried and in which "both classes" of members — C corporation members and nonlife insurance company members — have positive income before the CNOL deduction. In that case, the limitation on deduction of NOLs and CNOLs is determined by adding (i) 80% of the pre-CNOL income generated by the class of C members (C member income pool); and (ii) 100% of the pre-CNOL income generated by the class of nonlife insurance company members.

The final regulations also provide rules for more complicated scenarios, such as a consolidated return year in which the group has positive income before a CNOL deduction, and the "C member" income pool (which appears to be synonymous with the "residual income pool" described previously) is positive, but the nonlife insurance company pool is negative. In that case, the 80% limitation applies to the group's income; in contrast, the 80% limitation does not apply when the group has positive income before a CNOL deduction, but the C member income pool is negative; in that case, the CNOL deduction is limited to the group's income.

Other more complicated scenarios addressed by the final regulations involve the CNOL deduction computation when a pre-2018 NOL is carried over to a "mixed" group (e.g., in 2021). The final regulations allocate the pre-2018 NOL pro-rata to the C member income pool and the nonlife insurance company member income pool in proportion to their current-year income.

Farming losses

The final regulations clarify that the maximum amount of farming loss is the CNOL of the group rather than the NOL of the specific member generating the loss in farming activities. In addition, the final regulations allocate the farming loss to each member of the group in proportion to their share of total losses for the year, without regard to whether each member actually engaged in farming activity.

Separate return limitation year

The final regulations adopt the proposed regulations in creating special rules applicable to losses arising in a SRLY. The SRLY rules are designed to limit the extent to which a consolidated group can claim a CNOL deduction that is attributable to NOLs generated in years in which the attributable member was not a member of the group. The limitation relies upon the mechanics of a "cumulative register." The cumulative register is a notional account that limits SRLY NOL absorption by the group to the cumulative amount of the member's net positive contribution to the consolidated group's income; thus, the group will not be able to absorb SRLY NOLs of a member that continues to generate losses while a member of the consolidated group. For positive contributors that are subject to the 80% limitation (e.g., members other than nonlife insurance members), however, the final regulations modify the SRLY rules to reflect application of the 80% limitation, thus generally reducing $100 of income in the SRLY member's cumulative register for every $80 of SRLY NOL absorbed by the consolidated group. Stated another way, the SRLY member must generate $100 of income in order for the consolidated group to absorb $80 of SRLY NOL.

In addition, the final regulations clarify that the special SRLY register rule for implementing the 80% limitation does not apply for purposes of the dual consolidated loss rules under IRC Section 1503(d), which incorporate SRLY principles under Treas. Reg. Section 1.1503(d)-4(c)(3) by cross-reference to the SRLY rules.


Most consolidated groups will likely welcome the substantive guidance in the final regulations and the speed with which they were delivered, after having been proposed only about three months earlier.

The final regulations will become particularly relevant in 2021, once the CARES Act relief from the 80% limitation on NOL absorption ceases to apply (indeed, the regulations generally apply to tax years beginning after December 31, 2020). However, consolidated groups with nonlife insurance company members, or with members engaged in farming activities, may also find the guidance in the final regulations useful for resolving issues under the TCJA and CARES Act that are not otherwise addressed by the regulations for prior periods.

It bears repeating that these final regulations do not amend the "split waiver" temporary regulations that were issued concurrently with proposed regulations (see Tax Alert 2020-1745). As noted in the Preamble to the final regulations, commenters requested the potential expansion of the number of scenarios for which a split-waiver election is available; however, the government responded that any decision regarding these comments will be part of the future finalization of the temporary split-waiver regulations.


Contact Information
For additional information concerning this Alert, please contact:
National Tax M&A Group - International Tax and Transaction Services
   • Donald Bakke (
   • Brian Peabody (
   • Andrew Dubroff (
   • Chris Nelson (
   • Gary Vogel (
Financial Services – International Tax and Transaction Services
   • Chris Ocasal (
   • Revital Gallen (