COVID-19 tax guidance for businesses

The Coronavirus Aid, Relief, and EconomicSecurity (CARES) Act, P.L. 116-136, enacted March 27, included a number of tax provisions aimed at helping businesses deal with the economic fallout of the COVID-19 pandemic. These included temporary changes to the net operating loss (NOL) rules, a new business interest expense election, and the extension of 100% bonus depreciation to qualified improvement property. In April, the IRS released guidance on how businesses can make the most of these provisions. The IRS also provided procedures to allow partnerships to file amended returns for 2018 or 2019 to take advantage of CARES Act provisions.

NET OPERATING LOSSES

Under the CARES Act, taxpayers with NOLs arising in tax years beginning in 2018, 2019, and 2020 can carry them back five years. The IRS provided guidance on how taxpayers can elect to waive or reduce that carryback provision (Rev. Proc. 2020-24). The IRS also extended the deadline for filing an application for a tentative carryback adjustment under Sec. 6411 to carry back an NOL that arose in any tax year that began during calendar year 2018 and that ended on or before June 30, 2019.

Section 2303(b) of the CARES Act amended Sec. 172(b)(1) to provide for a carryback of any NOL arising in a tax year beginning after Dec. 31, 2017, and before Jan. 1, 2021, to each of the five tax years preceding the tax year in which the loss arises (carryback period) (Sec. 172(b)(1)(D)). Sec. 172(b)(3) permits a taxpayer entitled to a carryback period under Sec. 172(b)(1) to make an irrevocable election to relinquish the carryback period for an NOL for any tax year.

An election to waive a Sec. 172(b)(3) carryback for NOLs arising in tax years beginning in 2018 or 2019 must be made no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the first tax year ending after March 27, 2020. A taxpayer makes the election by attaching to its federal income tax return filed for the first tax year ending after March 27, 2020, a separate statement for each of the tax years 2018 or 2019 for which the taxpayer intends to make the election. The election statement must state that the taxpayer is electing to apply Sec. 172(b)(3) under Rev. Proc. 2020-24 and the tax year for which the statement applies.

The revenue procedure also explains how taxpayers that have an inclusion in income because of Sec. 965(a) in 2018, 2019, or 2020 can elect to exclude that year from the NOL carryback period. Those taxpayers may elect under Sec. 172(b)(1)(D)(v)(I) to exclude all Sec. 965 years from the carryback period for an NOL arising in a tax year beginning in 2018, 2019, or 2020. The election for an NOL arising in a tax year beginning in 2018 or 2019 must be made no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the first tax year ending after March 27, 2020.

For an NOL arising in a tax year beginning after Dec. 31, 2019, and before Jan. 1, 2021, an election must be made by no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the tax year in which the NOL arises. The election is made by attaching a statement to the return.

The revenue procedure further provides guidance regarding elections under the special rule in Section 2303(d) of the CARES Act to waive any carryback period, to reduce any carryback period, or to revoke any election made under Sec. 172(b) to waive any carryback period for a tax year that began before Jan. 1, 2018, and ended after Dec. 31, 2017.

In related guidance, Notice 2020-26 extends the deadline for filing an application for a tentative carryback adjustment under Sec. 6411 to carry back an NOL that arose in any tax year that began during calendar year 2018 and that ended on or before June 30, 2019.

Sec. 6411 allows a taxpayer to file an application for a tentative carryback adjustment of the tax liability for a prior tax year that is affected by an NOL carryback in Sec. 172(b) or by carrybacks provided for in other Code sections. Under Regs. Sec. 1.6411-1(b)(1), corporations must use Form 1139, Corporation Application for Tentative Refund, and taxpayers other than corporations must use Form 1045, Application for Tentative Refund. Sec. 6411(a) and Regs. Sec. 1.6411-1(c) both require that an application be filed within 12 months of the close of the tax year in which the NOL arose. The tentative carryback adjustment procedure allows a taxpayer to obtain a quick tentative tax refund based on an NOL carryback. The IRS conducts a limited examination of the application and makes the resulting credit or refund within 90 days of filing the application. The IRS is temporarily accepting Forms 1139 and 1045 by fax from taxpayers claiming refunds under the CARES Act.

The CARES Act did not provide additional time to file tentative carryback adjustment applications for NOLs arising in a tax year beginning on or after Jan. 1, 2018, and ending before March 27, 2019, even though the time to file those applications had expired when it was enacted. Taxpayers with losses in these tax years that may now be carried back to an earlier tax year will generally be able to file amended returns to claim refunds or credits resulting from the change in the law. These taxpayers, however, would not be able to take advantage of the expedited Sec. 6411 tentative carryback adjustment procedure without an extension of time to file Form 1139 or Form 1045.

Therefore, the IRS is granting a six-month extension of time to file Form 1045 or Form 1139 for taxpayers that have an NOL that arose in a tax year that began during calendar year 2018 and that ended on or before June 30, 2019. This extension of time is limited to requesting a tentative refund to carry back an NOL and does not extend the time to carry back any other item.

To take advantage of this extension, taxpayers must file the form no later than 18 months after the close of the tax year in which the NOL arose (i.e., no later than June 30, 2020, for a tax year ending Dec. 31, 2018); and include on the top of the form “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”

CORPORATE MINIMUM TAX CREDITS

The CARES Act also accelerated the recovery of corporations’ remaining minimum tax credits. The full amount of a corporation’s unused credits can be claimed in 2019. Alternatively, a corporation can elect instead to claim 100% of any remaining credit as a refund in its 2018 tax year using Form 1139 (with an extended filing date for the refund claim of Dec. 31, 2020). As noted above, the IRS is temporarily accepting Forms 1139 by fax.

RETROACTIVE 100% BONUS DEPRECIATION ON QIP

The IRS also issued procedures for how taxpayers can take advantage of the recently enacted technical correction to the rules for qualified improvement property (QIP) (Rev. Proc. 2020-25). QIP was unintentionally classified, under the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, as nonresidential real property, which does not qualify for bonus depreciation. The CARES Act fixed this mistake — the so-called retail glitch — by making QIP 15-year property so it qualifies for bonus depreciation retroactively to 2017. Rev. Proc. 2020-25 explains how taxpayers can change their depreciation under Sec. 168(e) for QIP placed in service after Dec. 31, 2017, in a tax year ending in 2018, 2019, or 2020 to take advantage of the fix.

Under the revenue procedure, certain taxpayers can elect to take 100% bonus depreciation on the QIP by filing an amended return, an administrative adjustment request (AAR) under Sec. 6227, or a Form 3115, Application for Change in Accounting Method, to change their depreciation of QIP placed in service after Dec. 31, 2017, in the taxpayers’ 2018, 2019, or 2020 tax year.

The revenue procedure also allows a taxpayer to make a late election, or to revoke or withdraw an election, under Sec. 168(g)(7), (k)(5), (k)(7), or (k)(10) for the 2018, 2019, or 2020 tax year, for property placed in service by the taxpayer during its 2018, 2019, or 2020 tax year, for a limited period. Because of the administrative burden of filing amended returns and AARs, the IRS has determined that it is appropriate to treat the making of a late election under Sec. 168(g)(7), (k)(5), (k)(7), or (k)(10), or the revocation of the revocable election under Sec. 168(k)(5), (k)(7), or (k)(10), for property placed in service by taxpayers during their 2018, 2019, or 2020 tax years, as a change in method of accounting with a Sec. 481(a) adjustment for a limited period of time.

BUSINESS INTEREST EXPENSE ELECTION

Real property or farming trades or businesses can withdraw their decision to elect out of Sec. 163(j)’s business interest expense limitation for a 2018, 2019, or 2020 tax year, the IRS said in Rev. Proc. 2020-22. Those businesses can also make late interest expense elections for those years.

The guidance also addresses how businesses can make certain other interest expense elections for 2019 and 2020 under emergency relief provisions included in the CARES Act.

Real property or farming trades or businesses

One reason an electing real property or farming trade or business might wish to withdraw its election out of the business interest expense limitation involves bonus depreciation. The Sec. 163(j)(7) election comes with a trade-off, which is that an electing business must depreciate certain property more slowly using the alternative depreciation system and is not eligible for bonus depreciation.

Now that 100% bonus depreciation can extend to QIP, retroactive to the effective date of the TCJA, some businesses that made the election out of Sec. 163(j)’s interest expense limit before the passage of the CARES Act may no longer benefit from the election (which is generally irrevocable).

The IRS provided these taxpayers relief in Rev. Proc. 2020-22, under which an electing business that follows the steps outlined in the revenue procedure “will be treated as if the election was never made.” The business should file an amended federal income tax return, an amended Form 1065, U.S. Return of Partnership Income, or an AAR, as applicable, for the tax year in which the election was made, with an election withdrawal statement. The deadline for doing so is on or before Oct. 15, 2021 (but not later than the applicable limitation period on assessment for the tax year for which the amended return is being filed), with an exception as provided in recently issued Rev. Proc. 2020-23 regarding the time to file amended Bipartisan Budget Act of 2015 (BBA), P.L. 114-74, partnership returns for 2018 and 2019 tax years.

Separately, the revenue procedure addresses how to make a late Sec. 163(j)(7) election for 2018, 2019, or 2020.

CARES Act changes to the interest limitation for 2019 and 2020

The CARES Act also retroactively loosened the interest expense limitation to help speed economic relief to businesses during the COVID-19 crisis. For tax years beginning in 2019 and 2020, Sec. 163(j) is amended to increase the adjusted taxable income (ATI) percentage from 30% to 50%. Also, taxpayers can elect to use 2019 income in place of 2020 for the computation.

Rev. Proc. 2020-22 provides the time and manner for certain taxpayers to make relevant elections:

• To not apply the 50% ATI limitation;
• To use the taxpayer’s 2019 income to calculate the interest expense limitation in 2020; and
• For a partner to elect out of the 50% excess business interest expense rule.

Rev. Proc. 2020-22 is effective immediately.

PARTNERSHIP AMENDED RETURNS

The IRS also announced that it is allowing partnerships subject to the centralized audit provisions in the BBA to file an amended partnership return for 2018 or 2019 to take advantage of beneficial tax provisions in the CARES Act (Rev. Proc. 2020-23). BBA partnerships are normally prohibited from filing an amended return after they have filed Form 1065 and provided Schedules K-1, Partner’s Share of Income, Deductions, Credits, etc., to their partners; however, under Rev. Proc. 2020-23 they may file an amended partnership return for 2018 or 2019 to take advantage of the CARES Act provisions.

Their deadline for filing amended Forms 1065 and furnishing corresponding Schedules K-1 is Sept. 30, 2020. When filing, the BBA partnership should write “Filed pursuant to Rev. Proc. 2020-23” at the top of the amended return and attach a statement with each Schedule K-1 sent to the partners with the same notation. Although the IRS said partnerships can file by mail or electronically, filing electronically will speed the process.

Partnerships currently under IRS examination should notify the revenue agent (RA) and furnish a copy of the amended returns and Schedules K-1 to the RA. If a BBA partnership has filed an AAR for a year that it is amending, it should use the figures on the AAR when filing the amended return.

About the authors

Sally P. Schreiber, J.D., and Dave Strausfeld, J.D., are JofA senior editors. To comment on this article or to suggest an idea for another article, contact them at Sally.Schreiber@aicpa-cima.com or David.Strausfeld@aicpa-cima.com.