2020 NOL and 2019 NOL - Rev. Proc. 2020-24

[EmsBTW2016]

I have a new client (Individual, 1040-NR) who has an NOL originating in 2018 that was carried forward to their 2019 return (and used in 2019) the remainder is a carry forward to 2020.

2020 has a loss, so we now have an NOL originating in 2020 plus the remainder of the 2018 NOL that could not be used in 2019. 

This client is going to be shutting down their US business and probably will not file a return after tax year 2021. 

I think the last time the client had any income besides the minimal amount in 2019 was in 2014 (would have to request returns prior to 2018 to confirm) - so I don't see any benefit to using the carry back or the carry forward for that matter since the business is shutting down. 

Is there anything I need to do besides checking the box to waive the carry back? Do I even really have to check that box? It looks like nothing like that was done for the 2018 NOL that was used in 2019. 

This seems like kind of a huge pain for something we can't even benefit from....

[TaxGuyBill]

---

@EmsBTW2016 wrote:

I think the last time the client had any income besides the minimal amount in 2019 was in 2014 (would have to request returns prior to 2018 to confirm) - so I don't see any benefit to using the carry back or the carry forward for that matter since the business is shutting down. 

---

Was the election made to "waive the carryback" for 2018?  If not, it would be carried back to 2013, which could benefit the taxpayer.

And just to confirm ... the taxpayer is a Nonresident Alien, but has had a US sourced business?

[EmsBTW2016]

I do not see where the election to waive the carry back was made. There was nothing attached to the 2019 return.

It seems like we might need to amend 2019 so that we can do the following

1. Exclude the 2018 NOL from 2019

2. Include any portion of the 2018 NOL that could be carried back to 2019 (after carrying back to '13, '14, '15, '16, '17).

3. Include any portion of the 2020 NOL that could be carried back to 2019 (after carrying back to '15, '16, '17, '18).

I would also then be able to file form 1045 with the current year 2020 1040-NR to utilize the 2020 NOL beginning in year 2015 and up to 2018 since we would be amending 2019. 

Am I making things more complicated than need be? Any other way to fix this?

Yes, the client resides in another country but has US sourced income. They used to travel here frequently before COVID. Now they are working solely in their home country and looking to shut down all US entities. 

[TaxGuyBill]

---

@EmsBTW2016 wrote:

I do not see where the election to waive the carry back was made. There was nothing attached to the 2019 return.

---

Originally, there was no carry back option for 2018.  It could be only carried forward, which is why you don't see an election. 

But the CARES Act retroactively changed that, so if no election is made on the 2018, 2019 or 2020 return to "waive the carryback", then you get to carry it back, which may be good for the taxpayer.

Yes, everything else about the NOL computations seem correct.  However, you may first want to look at how big the NOL is and how much you will need to charge the taxpayer to do all of this work.   If the NOL is not very large, your fees may be larger than any tax-savings.  If that is the case, it may be better for the taxpayer to just "waive the carryback" now and forget about the NOL.

[EmsBTW2016]

Thank you!

I have calculated the tax savings as $3500. The NOL is 20k for 2018 and 4k for 2020.

I have completed two separate 1045s and used tax tables from 2013 and 2015 to calculate the tax difference.

I have also compared the tax savings my client received from taking the 2018 NOL in 2019, and due to the 80% limitation, the tax savings was only $800.

I feel like the work involved will cost them around $1500 (I'm guessing 8-10 hours max) so I think it is worth the trouble? I realize I have to amend the 2019 1040, mail it in, and also include in 2020 tax return the two 1045s and include all attachments necessary. Am I missing anything else that would be time consuming?

Thanks so much for your help - this is my first time doing something like this on my own (I have done NOL carry backs back at a large firm but now I am out on my own!)

[rbynaker]

The other thing you might budget some time for is convincing the IRS that the statute of limitations hasn't expired because you're filing due to an NOL.  See IRC 6511(d)(2)(A).

[sjrcpa]

I think the 80% limitation went away, too. Not sure for what year this is effective.

[TaxGuyBill]

---

@EmsBTW2016 wrote:

I have completed two separate 1045s and used tax tables from 2013 and 2015 to calculate the tax difference.

...

I realize I have to amend the 2019 1040, mail it in, and also include in 2020 tax return the two 1045s and include all attachments necessary. Am I missing anything else that would be time consuming?

Just to be clear, you need to AMEND 2013-2015.  It is too late to use a 1045 to get the refund based on the 2018 NOL.  You need to amend to get it.

The 1045 for 2018 would only be included on the 2020 return to show the calculation of any NOL carryforward. 

[EmsBTW2016]

Well this changes things. If it was just amending one return then it would be worth it. Thank you for pointing that out.

I had meant to say that the 2018 NOL carry back goes to 2013 and can be completely used in 2013. - So as you pointed out this one would require an amendment since the NOL is from 2018 and the time limit has passed to use 1045.

The 2020 NOL carry back would go back to 2015 and can be completely used in 2015. So the 1045 for 2015 is related to the 2020 NOL, not the 2018 NOL.

So to summarize, I would have to file an amended 2019 return, amended 2013 return, and then would I be able to file the 2015 1045 with the 2020 return since it is related to the 2020 NOL?

Am I understanding correctly? 

After all of this, I am not sure it is worth the difference in tax savings. At least I am learning 🙂

EDIT: I am reaching here but I am guessing it is not allowable for us to carry back the 2020 NOL to 2015 via form 1045 without also carrying back the 2018 NOL? I just want to make sure I have done everything I reasonably can do before saying its not worth the trouble. 

[TaxGuyBill · Accepted solution]

Except for your edit, that is correct.

You would amend 2013 to use up the 2018 NOL and amend 2019 to cancel the NOL that was being carried forward (because now it is being used up in 2013).  So that only involves amending 2 tax returns.  Without knowing your pricing structure, it seems like the $3000-ish tax savings may be larger than the cost to amend 2 tax returns.

You would file 1045 to use your 2020 NOL, and the 1045 is based on the 2015 tax return.  You are currently preparing the 2020 return anyways, so the only extra 'time' that is involved here is the time to fill out a 1045.

As far as your "edit", each NOL stands alone.  So if you want to "waive the carryback" for one year and not the other, that is allowable.

[EmsBTW2016]

Thank you so much for your responses!

My final decision is the following:

2018 NOL - waive the election to carryback

The 2018 NOL would generate tax savings of 2,300 if carried back, but utilizing it in 2019 by carrying it forward generated tax savings of 800. This makes the net tax savings about 1500 with respect to the 2018 NOL. Given the risk of opening up 2013 to audit, and the time to file 2 amended fed and California tax returns, I think its best to waive the election.

2020 NOL - file form 1045 and generate new tax savings of $1200 with a minimal fee for my services

The 2020 NOL is another story! It can generate tax savings of $1200 without having to amend any returns. I am going to prep the 2020 return in Proconnect as planned, and then mail in the 1045 to claim a refund for the 2020 NOL being carried back to 2015. 

Ive gone back and forth and wasted time trying to make calculations etc. and estimate my time - being newly on my own, this is just part of the learning curve of owning a business. I greatly appreciate your feedback and advice on the ruling as I was not interpreting it correctly from the start. Thank you!