IRS Issue Net Operating Loss Guidance for Consolidated Groups by Angie Adames, CPA
Posted on July 28, 2020
by
Angie Adames
The use of net operating losses (NOLs) to offset taxable business income continues to evolve under the CARES Act, which temporarily reinstates NOL carrybacks that were previously eliminated under the Tax Cuts and Jobs Act (TCJA). The most recent IRS guidance concerns the application of the new NOL rules for consolidated groups.
The TCJA, which went into effect beginning in the 2018 tax year, generally eliminated NOL carrybacks, imposed income limits on NOLs that could be carried forward indefinitely and provided special rules for non-life insurance companies and farming businesses. However, with the financial impact of the COVID-19 pandemic, Congress enacted the CARES Act in 2020, essentially delaying the application of the TCJA amendments until January 1, 2021.
The CARES Act helps businesses improve immediate cash flow by allowing them to carry back NOLs arising in tax years 2018 through 2020 to each of the five preceding years where they may be used to offset income earned and taxes previously paid. In general, the new law requires taxpayers to carry back the entire amount of such NOLs to the earliest taxable year within the five-year carryback period. As an added benefit, the law suspends the TCJA’s 80 percent of taxable income on NOL carryforwards, allowing taxpayers an opportunity to potentially eliminate all their taxable income in a given year. Consequently, taxpayers may calculate NOL deductions as the sum of:
- The total of the NOLs arising before January 1, 2018 (pre-2018 NOLs) that are carried to that year; plus
- The lesser of:
-
- The total of the NOLs arising after December 31, 2017; or
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- 80 percent of the excess, if any, of taxable income computed without regard to any NOLs or Section 199A and 250 deductions over the total amount of pre-2018 NOLs carried to that year (the 80 percent limitation).
Under the IRS’s most recent guidance, businesses can take advantage of NOLs generated by the companies they acquired and enjoy tax breaks from losses they did not suffer on their own. More specifically, the temporary regulations allow certain acquiring consolidated groups to make elections to waive all or a portion of the pre-acquisition portion of the extended carryback period for certain losses attributable to certain acquired members. The proposed regulations would remove obsolete provisions from the rules for consolidated groups that contain both life insurance companies and non-life insurance companies.
About the Author: Angie Adames, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she provides tax and business consulting services to real estate companies, manufacturers and closely-held entities. She can be reached at the firm’s Miami office at (305) 379-7000 or info@bpbcpa.com.
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