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In Revenue Procedure 2020-24 (issued April 9, 2020), the US Treasury Department (Treasury) and the Internal Revenue Service (IRS) establish the timing and methods for making certain elections related to the carryback of net operating losses (NOLs) under IRC Section 172, which were enacted under The Coronavirus Aid, Relief, and Economic Security Act, P.L. 116-136 (CARES Act).

Background

In 2017, P.L. 115-97 (commonly referred to as The Tax Cuts and Jobs Act or TCJA) repealed taxpayers' ability to carry back NOLs to prior tax years. The TCJA also limited deductions for NOLs incurred in tax years beginning after December 31, 2017, to 80% of the taxable income in the carryforward year.

The CARES Act allows the carryback of NOLs incurred in tax years beginning after December 31, 2017, and before January 1, 2021, to each of the five tax years preceding the loss year and suspends the 80% taxable income limitation for NOLs incurred in tax years beginning before January 1, 2021. For NOL carrybacks, taxpayers may elect under IRC Section 172 to skip any tax years during the carryback period in which they had an amount includible by reason of IRC Section 965(a) (a Section 965 inclusion year); if the taxpayer does not elect to skip its IRC Section 965 inclusion years, the CARES Act treats the taxpayer as having made an IRC Section 965(n) election for those tax years.

Revenue Procedure 2020-24: Deemed IRC Section 965(n) election and definition of an IRC Section 965 inclusion year

In determining an NOL deduction or the amount of a NOL carryover or carryback to a Section 965 inclusion year, taxpayers were allowed to elect under IRC Section 965(n) to disregard an IRC Section 965(a) inclusion and any associated foreign taxes that are deemed paid under IRC Section 960 and treated as a dividend under IRC Section 78. Treas. Reg. 1.965-7(f)(2) provides further that the IRC Section 965(n) election also applies to determine a taxpayer's NOL in the Section 965 inclusion year. As a result, if an IRC Section 965(n) election is made, an NOL deduction allowed in the Section 965 inclusion year cannot reduce the taxpayer's IRC Section 965(a) inclusion (and any associated IRC Section 78 dividend). The election can also result in the taxpayer having a current-year NOL in the Section 965 inclusion year.

Revenue Procedure 2020-24 addresses three IRC Section 965 issues that are relevant to the carryback of NOLs. First, it provides that the election to skip a year in the carryback period applies only to a tax year in which the taxpayer had an actual inclusion by reason of IRC Section 965(a). As a result, a taxpayer that did not have an actual IRC Section 965(a) inclusion (because its pro rata share of E&P deficits exceeded its pro rata share of the positive E&P of its deferred foreign-income corporations) may not elect to skip tax years in its carryback period.

Second, Revenue Procedure 2020-24 states that a deemed 965(n) election applies only for purposes of carrying back an NOL to a Section 965 inclusion year. Thus, it is the position of Treasury and the IRS that, if a taxpayer did not make an actual IRC Section 965(n) election (or revoke an IRC Section 965(n) election), the deemed IRC Section 965(n) election does not prevent other current NOLs or NOLs carried forward to the Section 965 inclusion year from reducing the taxpayer's IRC Section 965 liability. Under this position, the deemed IRC Section 965(n) election will not release a current-year NOL or NOL carryforward that the taxpayer otherwise used to reduce its IRC Section 965 inclusion.

Finally, Revenue Procedure 2020-24 states that an election to skip a Section 965 inclusion year applies to all Section 965 inclusion years excluded from the carryback period and is not revocable.

Revenue Procedure 2020-24 establishes the timing and manner for electing to skip Section 965 inclusion years. For NOLs arising in a tax year beginning in 2018 or 2019, the election must be made by the due date, with extensions, of the tax return for the first tax year ending after March 27, 2020. The election for NOLs arising in a tax year beginning after December 31, 2019, and before January 1, 2021, must be made by the due date, with extensions, of the tax return for the tax year in which the NOL arises.

The election to skip Section 965 inclusion years is made by attaching a statement to the earliest filed, after April 9, 2020, of: (1) the tax return for tax year in which the NOL arises, (2) the claim for a tentative carryback adjustment on Form 1045 or Form 1139 to a tax year in the carryback period, or (3) the amended tax return applying the NOL to the earliest carryback year that is not a transition year.

Implications

For NOLs in tax years beginning in 2018 or 2019, many taxpayers will want to quickly file either a claim for a tentative carryback adjustment or an amended tax return applying the NOL to the earliest carryback year once the IRS recommences accepting paper-filings. (See Tax Alert 2020-0925) Before seeking a refund, taxpayers will need to understand the collateral impacts of the carryback. Similarly, due to the requirement to elect to skip Section 965 inclusion years on the earliest of these refund claims, these taxpayers will need to determine the collateral consequences of the transition-year-exclusion election. Taxpayers with NOLs arising first in tax years beginning in 2020 will have more time to assess these collateral consequences.

International tax considerations in carrying back an NOL and electing to skip Section 965 inclusion years include the following:

IRC Section 965 transition tax liability and IRC Section 904 FTC limitation

• Carrying an NOL to a pre-IRC Section 965 inclusion year may increase foreign tax credit (FTC) carryforwards available to offset a taxpayer's income tax liability (including IRC Section 965 transition tax liability) in a Section 965 inclusion year.
• A greater NOL deduction will reduce a taxpayer's IRC Section 904 FTC limitation, which will generally result in FTC carryforwards that may offset a regular tax liability in other years.
• Domestic-source NOLs may create or increase overall domestic loss (ODL) accounts (a beneficial tax attribute).
• Foreign-source NOLs may create or increase separate limitation loss (SLL) or overall foreign loss (OFL) accounts (detrimental tax attributes) and limit the ability to use FTCs (including in a Section 965 inclusion year).
• If a taxpayer elected under IRC Section 965(h) to pay its IRC Section 965 transition tax liability in installments, any reduction to a taxpayer's IRC Section 965 transition tax liability by reason of an NOL carryback would not result in an immediate refund. Instead, future IRC Section 965 transition tax installment payments would be reduced.
• Claiming a refund due to an NOL carryback frequently requires amending a return, requiring reexamination of positions impacted by subsequently finalized regulations.

IRC Section 59A (BEAT) liabilities

• Carrying back an NOL to a tax year in which IRC Section 59A is effective may create or increase a taxpayer's BEAT liability. Under current law, a taxpayer's BEAT liability generally equals the excess of 10% of its modified taxable income over its regular tax liability less certain credits. Thus, any reduction to a taxpayer's regular tax liability by reason of an NOL carryback may be offset by an equal increase to its BEAT liability.
• Consideration should be given to waiving deductions (including on an amended return) to limit adverse BEAT impacts.

IRC Section 250(a)(2) taxable income limitation

• IRC Section 250(a)(2) reduces a domestic corporation's allowable IRC Section 250(a)(1) deduction when the sum of its foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) exceeds its taxable income for the year (determined without regard to IRC Section 250). Carrying back an NOL, therefore, may reduce a taxpayer's allowable IRC Section 250 deduction; thus, the taxpayer would be forced to use an attribute that might otherwise offset income taxable at a 21% rate to offset income (GILTI and FDII) that is effectively subject to lower rates because of the IRC Section 250 deduction.

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