IRS issues rules for net operating losses in consolidated groups

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The Internal Revenue Service and the Treasury Department released proposed regulations and temporary regulations to offer guidance for consolidated groups on net operating losses in the wake of changes under both the Tax Cuts and Jobs Act of 2017 and the CARES Act from this year.

Both pieces of legislation amended the rules for NOLs, with the CARES Act undoing some of the changes in the TCJA, allowing businesses to claim NOLs that had been restricted under the TCJA.

After amendment, the NOL deduction is now the sum of:

  • The total of the NOLs arising before Jan. 1, 2018 (pre-2018 NOLs) that are carried to that year; plus
  • The lesser of:
  • Either the total of the NOLs arising after Dec. 31, 2017; or
  • 80 percent of taxable income less pre-2018 NOLs (the 80% limitation).

The TCJA generally eliminated NOL carrybacks, but allowed NOLs to be carried forward indefinitely. The TCJA also provides special rules for nonlife insurance companies and farming losses. Nonlife insurance companies are allowed to carry back NOLs two years and forward 20 years, and the 80 percent limitation doesn’t apply. Farming losses are permitted to be carried back two years and carried forward indefinitely, subject to the 80 percent limitation.

The CARES Act effectively delays the application of the TCJA amendments until Jan. 1, 2021. On top of that, the CARES Act allows a five-year carryback period for NOLs, including farming losses and NOLs of nonlife insurance companies, for taxable years starting after Dec. 31, 2017 and before Jan. 1, 2021.

The proposed regulations offer guidance to consolidated groups on the application of the 80 percent limitation. The proposed regs would remove obsolete provisions from the rules for consolidated groups that contain both life insurance companies and nonlife insurance companies.

Because the CARES Act permits certain NOLs to be carried back five years, the temporary regulations allow certain acquiring consolidated groups to make an election to waive all or a part of the pre-acquisition portion of the extended carryback period for some losses attributable to certain acquired members.

The NOL provisions in the CARES Act made it easier for businesses to claim losses and receive generous tax breaks during the economic downturn from the novel coronavirus. By taking advantage of NOLs from businesses they have acquired, companies can enjoy tax breaks from losses they didn’t suffer on their own, which is one reason why the TCJA limited such tax breaks in the first place.

Some of the provisions pertaining to NOLs in the CARES ACT have been criticized as being overly generous by some lawmakers who complained the provisions were slipped into the mammoth legislation at the last minute. In April, Sen. Sheldon Whitehouse, D-R.I., and Rep. Lloyd Doggett, D-Texas, introduced a bill to undo the provisions, citing estimates by Congress’s Joint Committee on Taxation that the NOL tax break provisions for both businesses and individuals would cost $195 billion over 10 years.

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IRS CARES Act Tax regulations Coronavirus Tax breaks