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IRS Issues Rules for NOLs in Consolidated Groups

August 06, 2020

The IRS has issued proposed regulations on the net operating loss rules updated by the CARES Act. Here’s what you should know.

Attention taxpayers...the Internal Revenue Service and the Treasury Department released proposed regulations (Reg-125716-18) and temporary regulations (T.D. 9900) to offer guidance for consolidated groups on net operating losses in the wake of changes under the CARES Act. Here’s what you need to know.

Some background info

Did you read our blog, How does the CARES Act Impact NOLs? An NOL is a loss generated in a period when a company’s allowable tax deductions are greater than its taxable revenues. Prior to 2018, NOLs could be carried back up to two years to recover past tax payments, any unused amount would then be carried forward up to 20 years and it could offset 100% of taxable income whether carried back or forward. Since the enactment of the TCJA in 2017, NOLs could no longer be carried back but could only be carried forward indefinitely.

Additionally, the NOL deduction was limited to 80% of taxable income, before the NOL is applied (for losses arising in tax years after December 31, 2017).

How does the CARES Act change this?

The CARES Act changes these rules so that NOLs arising in tax years beginning after December 31, 2017 and before January 1, 2021 may be carried back to each of the five tax years preceding the tax year of the loss. IRS has published guidance that also allows for the revocation of previous elections that forgo the carryback of an NOL. In addition, the CARES Act temporarily removes the 80% offsetting loss limitation. The major benefit to going back five years is the tax rates were much higher back then. Fair Warning – the restrictive rules will be reinstated for tax years beginning after December 31, 2020.

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.

Recent update

The proposed regulations offer guidance to consolidated groups on the application of the 80 percent limitation.

What’s a consolidated group?

A consolidated group typically consists of a parent company and subsidiary members. Subsidiary members lose their individual tax identities during consolidation. They are treated as part of the parent company and their assets, liabilities and transactions are regarded as that of the parent company.

If passed, the regulations would remove obsolete provisions from the rules for consolidated groups that contain both life insurance companies and nonlife insurance companies.

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

Questions? Contact any member of our Tax Services Team.

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