The IRS has issued temporary and final regulations to provide guidance on the treatment of net operating losses (NOLs) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and certain treatment for consolidated groups. The guidance also includes the absorption of consolidated net operating loss carryovers and carrybacks and rules to consolidated groups that include both life insurance companies and other companies to reflect statutory changes.
CARES Act and the Tax Cuts and Jobs Act (TCJA) modifications to NOLs. The TCJA generally eliminated NOL carrybacks and permitted NOLs to be carried forward indefinitely. The TCJA also provides special rules for nonlife insurance companies and farming losses. Nonlife insurance companies are permitted to carryback NOLs two years and forward 20 years, and the 80 percent limitation does not 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 January 1, 2021. Under the CARES Act, NOLs arising in tax years beginning in 2018, 2019, and 2020 now have a five-year carryback period and an unlimited carryforward period, including farming losses and NOLs of nonlife insurance companies, for taxable years beginning after December 31, 2017 and before January 1, 2021. The general rule limiting an NOL deduction to 80 percent of taxable income does not apply to NOLs arising in these years.
Consolidated group NOL provisions and elections. The proposed regulations provide guidance to consolidated groups on the application of the 80 percent limitation and would remove obsolete provisions from the rules for consolidated groups that contain both life insurance companies and nonlife insurance companies. Additionally, given NOLs are now allowed to be carried back five years, the guidance allows certain acquiring consolidated groups to make an election to waive all or a portion of the pre-acquisition portion of the extended carryback period for certain losses attributable to certain acquired members.
If you have any questions related to the NOL rules and the impact to your consolidated tax return, please contact the Crosslin tax team. We are here to help!