One important item to note is that Treasury has said it intends to finalize the remaining provisions of the proposed regulations at a later date and welcomes further comments on those aspects that have not yet been finalized.
Changes to NOL rules in the TCJA & CARES Act
In 2017, the TCJA made two major changes to the rules governing carryovers of NOLs, eliminating taxpayers’ ability to carryback an NOL to a prior year, and modifying the rules for carryforwards, limiting them to 80% of taxable income for NOLs arising from taxable years beginning after December 31, 2017 (“post-2018 NOLs”), but also allowing these NOLs to be carried forward indefinitely.
However, the TJCA changes do not apply to farming losses or to insurance companies other than life insurance, and do not impose a taxable income limitation on NOLs arising from taxable years beginning before January 1, 2018 (“pre-2018 NOLs”).
In March, pursuant to the CARES Act, Congress again modified the NOL provisions, suspending the TCJA-enacted taxable income limitation for post-2018 NOLs for tax years beginning before January 1, 2021. The CARES Act also allowed taxpayers to carryback NOLs for five taxable years.
As a result of CARES Act modifications to the TCJA changes, there is no taxable income limitation for NOLs deducted in years beginning before January 1, 2021. However, for tax years beginning on or after January 1, 2021, taxpayers can only deduct NOLs equal to (a) the sum of pre-2018 NOLs, with no limitation, plus (b) post-2018 NOLs, up to 80% of the taxpayer’s taxable income for the year (computed without regard to any deductions under sections 172, 199A, and 250).
80 percent limitation under CNOL regulations
The final regulations modify the Reg. § 1.1502-21 CNOL regulations in order to implement the TCJA and CARES Act NOL changes, as they apply to consolidated corporations.
In general, the regulations implement the 80% limitation on a consolidated group basis by limiting, for taxable years beginning after December 31, 2020, a group’s deduction of post-2017 NOLs to the lesser of the aggregate amount of post-2017 NOLs carried to such year, or 80% of the excess (if any) of the group’s consolidated taxable income (computed without regard to any deductions under sections 172, 199A, and 250) over the aggregate amount of pre-2018 NOLs carried to such year.
The proposed regulations provided that the 80% limitation would apply based on the status of the member that generated the income and not on the entity whose CNOL is being absorbed.
The final regulations retain this favorable rule. Thus, for consolidated groups whose members only include non-property and casualty (“P&C”) companies with post-2017 CNOLs, this provides a straightforward calculation for determining the amount of post-2017 CNOLs that a consolidated group can use.
That said, there is a great deal of complexity when consolidated groups are mixed (i.e., when the group has non-P&C companies and P&C companies) and when consolidated groups have pre-2018 NOLs.
For these mixed groups, the proposed regulations adopted an approach that divided income of P&C companies and non-P&C companies into separate “pools” and allocated post-2018 CNOLs accordingly. The final regulations retain this pooling approach and adopt the rule in the proposed regulations that provided a pro-rata allocation of income between P&C and non-P&C companies with pre-2018 CNOLs and post-2017 CNOLs.
Separate return year limitation
The separate return year limitation (“SRLY”) rules generally aim to prevent loss tracking by corporations that enter or leave a consolidated group. The proposed regulations modified the SRLY rules in light of changes to the NOL provisions in the TCJA and CARES Act, as discussed above. The final regulations adopt these rules but provide that the 80% limitation does not apply to SRLY calculations under the dual consolidated loss regulations.
Applicability dates
These regulations apply to taxable years beginning after December 31, 2020. A taxpayer may choose to apply the rules in the final regulations for tax years before December 31, 2020, provided that the taxpayer applies the rules in their entirety and for all relevant tax years.
Mazars’ Insight
The IRS raced to finalize these regulations, largely adopting most of the rules in the proposed regulations that were released only four months before. The final CNOL regulations provide helpful, straightforward guidance for consolidated groups.
Note, however, that these regulations do not change, and did not finalize, the “split waiver” temporary regulations, issued in July, which allow taxpayers to elect to relinquish, with respect to all CNOLs attributable to an acquired corporation, the portion of the carryback period for which the acquired corporation was a member of another group.
Please contact your Mazars LLP professional for additional information.
This alert was produced in conjunction with Ivins, Phillips & Barker, Chtd.
Published on November 12, 2020
The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.