IRS Provides Special Election Procedures for Taxpayers with Farming Loss NOLs

(Parker Tax Publishing July 2021)

The IRS issued a revenue procedure that addresses elections and revocations relating to recently enacted rules affecting taxpayers with a net operating loss (NOL) for any tax year beginning in 2018, 2019, or 2020, all or a portion of which consists of a farming loss (Farming Loss NOL) as defined by Code Sec. 172(b)(1)(B)(ii). The procedure prescribes (1) when and how to make an election regarding all NOLs of the taxpayer, regardless of whether the NOL is a Farming Loss NOL, (2) provides that a taxpayer is treated as having made a deemed election with respect to certain NOL rules enacted under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) if the taxpayer, before December 27, 2020, filed one or more original or amended federal income tax returns, or applications for tentative refund, that disregard the CARES Act amendments regarding a Farming Loss NOL, and (3) prescribes when and how to revoke an election to waive the two-year carryback period for the farming loss portion of a Farming Loss NOL incurred in a tax year beginning in 2018 or 2019. Rev. Proc. 2021-14.

Background

The Tax Cuts and Jobs Act of 2017 (TCJA) amended Code Sec. 172(a)(2) to provide that, with regard to net operating losses (NOLs) arising in a tax year beginning after December 31, 2017, the amount allowed as an NOL deduction cannot exceed 80 percent of the taxable income of the taxpayer computed without regard to any NOL deduction (i.e., the 80-percent limitation). In addition, TCJA amended Code Sec. 172(b)(1) to generally eliminate NOL carrybacks. However, TCJA did provide a two-year carryback period for the portion of an NOL that is a farming loss as defined by Code Sec. 172(b)(1)(B)(ii). TCJA further amended Code Sec. 172(b)(1) to provide that taxpayers entitled to this two-year carryback period may make an irrevocable election to waive it. Code Sec. 172(b)(3), which predates the TCJA amendments, separately provides that any taxpayer entitled to an NOL carryback period under Code Sec. 172(b)(1) may irrevocably elect to relinquish the entire carryback period with respect to that NOL for any tax year. The TCJA changes relating to loss carrybacks apply to NOLs arising in tax years beginning after December 31, 2017.

Section 2303(a) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) amended Code Sec. 172(a) to provide that the 80-percent limitation applies only to NOLs arising in tax years beginning after December 31, 2017, that are deducted in tax years beginning after December 31, 2020. Section 2303(b) of the CARES Act also amended Code Sec. 172(b)(1) to provide a five-year carryback period for any NOL arising in a tax year beginning after December 31, 2017, and before January 1, 2021. Code Sec. 172(b)(1)(D)(i)(II), as added by Section 2303(b) of the CARES Act, provides, in part, that the two-year carryback period provided by Code Sec.172(b)(1)(B) for farming losses does not apply to any such NOL.

Section 281(a) of the COVID-related Tax Relief Act of 2020, which was enacted as part of the Consolidated Appropriations Act, 2021, amended Section 2303 of the CARES Act by adding a new subsection (e), which took effect as if originally included in the CARES Act. New Section 2303(e) of the CARES Act contains the following provisions:

(1) Section 2303(e)(1) of the CARES Act provides that a taxpayer with a an NOL for any tax year beginning in 2018, 2019, or 2020, all or a portion of which consists of a farming loss (Farming Loss NOL) may make an election to disregard the amendments made by Section 2303(a) and (b) of the CARES Act (i.e., the CARES Act Amendments).

(2) If a taxpayer makes the election under Section 2303(e)(1), the following consequences will result: (i) the 80-percent limitation will apply to determine the NOL deduction for each tax year beginning in 2018, 2019, or 2020 to the extent the deduction is attributable to NOLs arising in tax years beginning after December 31, 2017, and the 80-percent limitation will not apply to determine the NOL deduction for any tax year beginning before 2018; (ii) Code Sec. 172(b)(2)(C), as added by the TCJA and effective before enactment of the CARES Act, provides a modified taxable income rule to account for the 80-percent limitation which applies with regard to each tax year beginning in 2018, 2019, or 2020; and (iii) the NOL carryback period will be determined under Code Sec. 172(b), as amended by the TCJA and effective prior to enactment of the CARES Act, for any NOL arising in any tax year beginning in 2018, 2019, or 2020. For example, if a taxpayer with a Farming Loss NOL in 2018 makes the election under Section 2303(e)(1), only the portion of the Farming Loss NOL that consists of a farming loss can be carried back two tax years. In addition, no portion of any NOL that does not constitute a farming loss can be carried back to any tax year beginning before January 1, 2018.

(3) Section 2303(e)(1)(B)(i) of the CARES Act provides that, generally, an election to disregard the CARES Act Amendments (i.e., an affirmative election) under Section 2303(e)(1) must be made in the manner prescribed by the IRS. Once made, an election under Section 2303(e)(1) is irrevocable. An affirmative election must be made by the due date, including extensions, for filing the taxpayer's federal income tax return for the taxpayer's first tax year ending after December 27, 2020. However, in the case of any taxpayer with a Farming Loss NOL that files a return before December 27, 2020, that disregards the CARES Act Amendments, the taxpayer is treated as having made a deemed election under Section 2303(e)(1) unless the taxpayer amends such return to reflect such amendments by the due date (including extensions) for filing the taxpayer's return for the first tax year ending after December 27, 2020.

(4) Section 2303(e)(2) of the CARES Act provides taxpayers with the ability to revoke an election made under Code Sec. 172(b)(1)(B)(iv) or Code Sec. 172(b)(3) to waive the two-year carryback period if the election: (i) was made by the taxpayer before December 27, 2020; and (ii) relates to the two-year carryback period for the portion of any Farming Loss NOL that is a farming loss arising in tax years beginning in 2018 or 2019.

Rev. Proc. 2021-14

Last week, the IRS issued Rev. Proc. 2021-14, which prescribes when and how to make an election with regard to all NOLs of the taxpayer, regardless of whether the NOL is a Farming Loss NOL. Rev. Proc. 2021-14 also provides that a taxpayer is treated as having made a deemed election under Section 2303(e)(1) of the CARES Act if the taxpayer, before December 27, 2020, filed one or more original or amended federal income tax returns, or applications for tentative refund, that disregard the CARES Act Amendments with regard to a Farming Loss NOL. Rev. Proc. 2021-14 further prescribes when and how to revoke an election made under Code Sec. 172(b)(1)(B)(iv) or Code Sec. 172(b)(3) to waive the two-year carryback period for the farming loss portion of a Farming Loss NOL incurred in a tax year beginning in 2018 or 2019.

Section 3 of Rev. Proc. 2021-14 sets forth the procedures for a taxpayer with a Farming Loss NOL to make an affirmative election to disregard the CARES Act Amendments and describes when a taxpayer will be treated as having made a deemed election. It also includes a special procedure for certain taxpayers whose two-year carryback claims filed before December 27, 2020, were rejected by the IRS. Section 4 of Rev. Proc. 2021-14 provides the procedures for revoking an election not to apply the two-year carryback period for farming losses. Section 5 provides election procedures for consolidated groups.

For a discussion of computing NOLs for tax years beginning after 2017, see Parker Tax ¶99,105.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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