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Net Operating Losses
Carrybacks and Carry Forwards

see discussion regarding RSED here

see Form 1045 & 1040-X instructions here

see NOL helpful hints here

Effective January 1, 2018 most NOL carrybacks are no longer allowed.

Effective March 27, 2020 the above change was effectively repealed through 2020.
For each of the tax years 2018, 2019 and 2020 a Net Operating Loss incurred shall be carried back to each of the five taxable years preceding the taxable year of such loss.  It is not clear yet, if a NOL may optionally be carried back for less than all five taxable years.  There is an optional election (similar to a Sec 172(b)(3) election) to forgo the entire carry back of a 2018 NOL or 2019 NOL 172(b)(1)(D)(v)(II). generally, with an election due date of April 15, 2021 or October 15, 2021.

Effective April 9, 2020
06 Section 2303(d) of the CARES Act provides a special rule for NOLs arising in
taxable years which [both] begin before January 1, 2018, and end[ed] after December 31, 2017.
Under that special rule, applications under § 6411(a) with respect to such NOLs are
treated as timely filed if filed no later than 120 days after March 27, 2020, the date of
enactment of the CARES Act. Additionally, elections to forgo or reduce the carryback of
such NOLs, or elections to revoke any such prior elections, shall be treated as timely
made if made no later than 120 days after March 27, 2020.

(1) Elections to waive carryback under § 172(b)(3) for NOLs arising in taxable
years beginning in 2018 or 2019. A taxpayer within the scope of this revenue procedure
may elect under § 172(b)(3) to waive the carryback period for an NOL arising in a
taxable year beginning in 2018 or 2019. Such an election must be made no later than
the due date, including extensions, for filing the taxpayer’s Federal income tax return for
the first taxable year ending after March 27, 2020. A taxpayer must make an election
described in this section 4.01(1) by attaching to its Federal income tax return filed for
the first taxable year ending after March 27, 2020, a separate statement for each of
taxable years 2018 or 2019 for which the taxpayer intends to make the election. The
election statement must state that the taxpayer is electing to apply § 172(b)(3) under
Rev. Proc. 2020-24 and the taxable year for which the statement applies. Once made,
the election is irrevocable.

Rev. Proc. 2020-24

IRS Notice 2020-26

Internal Revenue Code, § 172. Net Operating Loss Deduction

Announced December 29, 2022
IRS Update to Post-Release Changes to Tax Forms, Instructions, and Publications

Update to 2021 Pub. 536 for certain post-2020 NOL deductions

If you viewed or downloaded the 2021 Pub. 536, before December 27, 2022, please note that certain information on pages 1, 5, and 8 should have been as shown below.

Page 1: What’s New:

NOL deduction limitation.

In general, your NOL deduction for tax years beginning after December 31, 2020, cannot exceed the sum of: (1) the NOLs carried to the year from tax years beginning before January 1, 2018; plus, (2) the lesser of: (a) the NOLs carried to the year from tax years beginning after December 31, 2017, or (b) 80% of the excess (if any) of taxable income computed without regard to deductions for NOLs, or Qualified Business Income (QBI), or section 250 deductions, over the NOLs carried to the year from tax years beginning before January 1, 2018.

Page 5: How To Carry an NOL Back or Forward, 3rd paragraph:

For nonfarming businesses, since you can’t carry the NOL to an earlier year, your NOL deduction for tax years beginning after December 31, 2020, cannot exceed the sum of:

1. The NOLs carried to the year from tax years beginning before January 1, 2018; plus

2. The lesser of:

a. The NOLs carried to the year from tax years beginning after December 31, 2017, or

b. 80% of the excess (if any) of taxable income computed without regard to deductions for NOLs, or Qualified Business Income (QBI), or section 250 deductions, over the NOLs carried to the year from tax years beginning before January 1, 2018.

Page 5: How To Claim an NOL Deduction, 1st paragraph:

If you have not already carried the NOL to an earlier year, your NOL deduction for tax years beginning after December 31, 2020, cannot exceed the sum of:

1. The NOLs carried to the year from tax years beginning before January 1, 2018; plus

2. The lesser of:

a. The NOLs carried to the year from tax years beginning after December 31, 2017, or

b. 80% of the excess (if any) of taxable income computed without regard to deductions for NOLs, or Qualified Business Income (QBI), or section 250 deductions, over the NOLs carried to the year from tax years beginning before January 1, 2018.

Page 8: Worksheet 2, line 11:

Combine lines 3, 4, and 6 above.

Link to the information:
https://www.irs.gov/forms-pubs/changes-to-current-forms-publications

There are at least four limitations that must be addressed before a NOL is deductible:

1. the owner’s “tax basis” in the business entity (Section 1366/Section 704)
2. the owner’s “at-risk basis” (Section 465)
3. the passive activity rules (Section 469)
4. and then net losses in excess of $250,000 ($500,000 for joint returns) are disallowed in the current year
   Any “excess business loss” (EBL) above those amounts is carried forward, and becomes a net operating loss in the following year.

A semi-carryback

Casualty Losses

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either the year in which the event occurred, or the prior year. See Publication 547 for details.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684, Casualties and TheftsPDF and its instructions.PDF

Affected taxpayers claiming the disaster loss on their return should put the Disaster Designation, such as: “FL Hurricane Ian” in bold letters at the top of the form. Be sure to include the FEMA disaster declaration number, for example: DR-4673-FL, on any return. See Publication 547 for details.  See this IRS information page.

Net Operating Losses (NOLs) generally can be used to offset other taxable income in prior years and in future years. Individuals need to decide at the time that they timely file their Form 1040 (if it shows a current year NOL) whether they want to elect pursuant to IRC §172(b)(3) to carry forward the loss to offset future taxable income, or to go with the default to carry the loss back two years (or occasionally another allowable period of time) and recoup taxes previously paid, plus occasionally even some interest on the money! (see discussion regarding IRS interest payments here). The odds of an audit are higher when an individual trader’s NOL carry back is filed using Form 1045 (with a proforma Form 1040-X as an attachment) and are even higher when filed using only Form 1040-X (without using Form 1045). But if all your ducks are in a row, the result is a refund of taxes paid at your potentially higher tax brackets in 2014 (than in 2017, for example) for a loss incurred during 2016.  A taxpayer generally has until October 15, 2017 to make this decision.

As with many regulatory or statutory tax elections, a taxpayer may elect to carry forward the loss by filing the election up to six months after the initial due date of a timely filed return, pursuant to Reg. 301-9100-2(b).  If you filed your original return on time but did not file the statement with it, you can make this choice on an amended return filed within 6 months of the due date of the return (excluding extensions). Attach a statement to your amended return, and write “Filed pursuant to section 301.9100-2” at the top of the statement. Once you choose to waive the carryback period, it generally is irrevocable, except perhaps with a timely filed superseding return. If you choose to waive the carryback period for more than one NOL, you must make a separate choice and attach a separate statement for each NOL year. If you do not file this statement on time, you cannot waive the carryback period.

Optionally a IRC §172(b)(3) election may be filed with a timely filed Form 1040 to carry forward the NOL rather than going back for a refund. The odds of audit when taking this approach are far less because there is no manual handling and examination of a Forms 1045 or 1040-X along with your prior year 1040s (this is because Forms 1045 and 1040-X are not filed when the taxpayer elects to carry forward). A trader might decide to carry forward if he was in low tax brackets in prior years, or he expects to be in higher tax brackets in future years, or if there are potentially any skeletons in the closet with his prior year returns. Additionally, by going back, the statute of limitations is extended giving the IRS extra time to begin an audit. Some people may see it as making no sense to potentially open a can-of-worms looking for a refund of prior year taxes if the prospects of going forward are more advantageous.

Another detriment of carrying back is that on the way back the taxpayer often forfeits several deductions, credits and exemptions that he originally was entitled to, thereby reducing the net benefit of the deductible NOL  For example: while it is necessary to refigure your income tax, alternative minimum tax, and credits, do not refigure your self-employment tax and additional Medicare tax. For information about refiguring your net investment income tax (NIIT), shared responsibility payment, and credits, see the Instructions for Form 1045 and the Instructions for Form 1040-X and the Instructions for Form 8960 and IRS Publication 536.

In summary, when an individual trader’s tax year 2016 M2M losses are large enough to create a NOL he must decide whether to carryback or to carry forward the loss. In either case if the year that the NOL is carried to does not fully use up the NOL amount by offsetting other income, then the remaining unused portion of the NOL is carried forward, to be applied year-by-year.

Decision to carry back NOL using IRS Form 1045 or using IRS Form 1040-X

Taxpayers  considering refund requests based on the carryback of losses or credits must be aware of the potential different results generated by the filing of an application for a tentative carryback adjustment (tentative) filed on a Form 1045, Application for Tentative Refund (for individuals), or Form 1139, Corporation Application for Tentative Refund (for corporations), versus the filing of an actual claim for refund (claim) on a Form 1040-X, Amended U.S. Individual Income Tax Return, or Form 1120X, Amended U.S. Corporation Income Tax Return.

One of the most significant differences involves the IRS’s ability to charge interest on subsequently determined deficiencies. While most taxpayers will not be concerned about potential deficiency interest issues, for certain taxpayers the potential negative ramifications of filing a tentative may be significant.

In general, the tentative is limited to specific items listed in Sec. 6411. These items include net operating loss (NOL) carrybacks, capital loss carrybacks and business credit carrybacks. A carryback of foreign tax credits (FTCs) is not specifically mentioned in Sec. 6411 and must be carried back on a Form 1040-X or 1120X.

One critical difference in the filing of a tentative versus a claim is the fact that a tentative is a pre-audit refund while a claim generally results in a post-audit refund.

Both tentative and claim carrybacks extend the period of assessment for the carryback year. One distinction related to this extension, which has not been focused on by many taxpayers, must be addressed. If a Form 1045 or 1139 is filed, the statute of limitations (SOL) for assessment of tax for the year to which the carryback is taken (i.e., the carryback year) is actually extended for an amount equal to the refund. This includes amounts related to the carryback and items unrelated to the carryback, as long as the deficiency does not exceed the refund importantly, interest is not subject to this limitation and may result in the Service assessing an amount in excess of the refund. If a Form 1040-X or 1120X is filed, the IRS may assess a deficiency attributable to the carryback item, but not one attributable to items unrelated to the carryback, within the extended period.

Could the use of Form 1040-X be considered potentially opening-a-can-of-worms:
However, because the Forms 1040-X and 1120X result in a pre-refund review, the Service may offset an unassessed, barred deficiency (including barred interest) in the carryback year against the requested refund.

Example 1: Calendar-year corporation C has an NOL carryback from 1993 to 1990. The SOL for assessment on the 1990 year is closed, except for carryback items. The carryback reduced tax by $1,000,000. Upon examination, it was determined that the carryback from 1993 was correct; however, an additional tax adjustment was discovered in the 1990 year. The tax adjustment is $950,000. Absent SOL considerations, deficiency interest of $262,892 would be due on the $950,000 tax increase for the period from 3/15/91 (the due date of the 1990 return) to 3/15/94 (the due date of the 1993 return), plus additional interest until the actual payment.

Scenario A: C files a tentative carryback claim on Form 1139. C will receive the $1,000,000 refund prior to examination of the Form 1139 by the IRS. As a result of the post-refund audit, C will be assessed tax of $950,000 plus deficiency interest of $262,892 for the period 3/15/91 to 3/15/94. In addition, C will be assessed deficiency interest on the $262,892 from 3/15/94 to the date of payment for both the $950,000 plus the appropriate deficiency interest.

Scenario B: C files the NOL carryback on Form 1120X. Although the SOL for assessment is closed on the 1990 tax year, as a result of the pre-refund audit, the $1,000,000 refund created by the NOL carryback will be offset by the barred deficiency ($950,000 + $50,000 of the deficiency interest). C will receive no refund; however, no additional tax or deficiency interest may be assessed.

Example 2: Calendar-year corporation C has an NOL carryback from 1993 to 1990. The SOL for assessment on the 1990 year is closed, except for carryback items. The carryback reduced tax by $1,000,000. Upon examination, it was determined that the carryback from 1993 was correct; however, an additional tax adjustment was discovered in the 1990 year. The tax adjustment is $2,000,000. Absent SOL considerations, deficiency interest of $553,457 is due on the $2,000,000 tax increase for the period from 3/15/91 (the due date of the 1990 return) to 3/15/94 (the due date of the 1993 return), plus additional interest until the actual payment.

Scenario A: C files a tentative carryback claim on Form 1139. C will receive the $1,000,000 refund prior to examination of the Form 1139 by the Service. As a result of the post-refund audit, C will be assessed tax of $1,000,000 plus deficiency interest of $276,728 for the period 3/15/91 to 3/15/94. In addition, C will be assessed deficiency interest on the $276,728 from 3/15/94 to the date of payment for both the $1,000,000 plus the appropriate deficiency interest. Note that the IRS can assess tax only up to the amount of the $1,000,000 refund rather than the $2,000,000 potential tax deficiency. Deficiency interest may then be assessed on the $1,000,000 tax deficiency.

Scenario B: C files the NOL carryback on Form 1120X. Although the SOL for assessment is closed on the 1990 tax year, as a result of the pre-refund audit, the $1,000,000 refund created by the NOL carryback will be offset by a portion of the barred underpayment equal to the amount of potential refund created by the carryback. C will receive no refund; however, no additional tax or deficiency interest may be assessed.

Although a client filing a carryback may need the refund as quickly as possible, a taxpayer must be sure of the significant distinctions between the filing of the request for tentative allowance on Forms 1045 and 1139 versus the claims for refund on Forms 1040-X and 1120X. The potential exposure for additional deficiency interest is particularly significant if a 10-year carryback is involved. This could truly be a trap for the unwary.

Could the use of Form 1045 be considered potentially opening-a-can-of-worms:

Internal Revenue Manual on the differences between using IRS Form 1045 or using IRS Form 1040-X

IRM 8.17.4.14
Tentative Allowances and Other Carryback Claims in Notice of Deficiency Statement

Internal Revenue Regulation Section 301.6213-1(b)(2) Exceptions to restrictions on assessment of deficiencies

301.6213-1(b)(2) Tentative carryback adjustments.

(i) If the district director or the director of the regional service center determines that any amount applied, credited, or refunded undersection 6411(b) with respect to an application for a tentative carryback adjustment is in excess of the overassessment properly attributable to the carryback upon which such application was based, the district director or the director of the regional service center may assess the amount of the excess as a deficiency as if such deficiency were due to a mathematical error appearing on the return. That is, the district director or the director of the regional service center may assess an amount equal to the excess, and such amount may be collected, without regard to the restrictions on assessment and collection imposed by section 6213(a). Thus, the district director or the director of the regional service center may assess such amount without regard to whether the taxpayer has been mailed a prior notice of deficiency. Either before or after assessing such an amount, the district director or the director of the regional service center will notify the taxpayer that such assessment has been or will be made. Such notice will not constitute a notice of deficiency, and the taxpayer may not file a petition with the Tax Court of the United States based on such notice. However, the taxpayer, within the applicable period of limitation, may file a regular claim for credit or refund based on the carryback, if he has not already filed such a claim, and may maintain a suit based on such claim if it is disallowed or if it is not acted upon by the Internal Revenue Service within 6 months from the date the claim was filed.

(ii) The method provided in subdivision (i) of this subparagraph to recover any amount applied, credited, or refunded in respect of an application for a tentative carryback adjustment which should not have been so applied, credited, or refunded is not an exclusive method. Two other methods are available to recover such amount: (a) By way of a deficiency notice under section 6212; or (b) by a suit to recover an erroneous refund under section 7405. Any one or more of the three available methods may be used to recover any amount which was improperly applied, credited, or refunded in respect of an application for a tentative carryback adjustment.

If the IRS reviews the NOL carryback more closely after the Form 1045 tentative refund has been issued, and the IRS determines that too much was refunded to the taxpayer, then the IRS can immediately go to Collections to recover the excess, without going through the normal administrative procedures and sending the taxpayer a 30-day letter or 90-day letter with the right to take it to Appeals, etc..  see:
IRC §6213(b)(3) Assessments arising out of tentative carryback or refund adjustments on Form 1045
IRC §6213(b)(1) Assessments arising out of mathematical or clerical errors
IRC §6213(b)(2) Abatement of assessment of mathematical or clerical errors

But if the IRS reviews the NOL carryback more closely after the Form 1040-X refund has been issued, and the IRS determines that too much was refunded to the taxpayer, then the IRS needs to go through the normal administrative procedures including sending the taxpayer a 30-day letter or 90-day letter with the right to take it to Appeals.

Joint Committee on Taxation issues

IRB 4.36.2 Identification of Joint Committee Cases
Joint Committee Refund Review: Twelve Questions to Consider

IRC §6213(b) Tentative adjustments
Any credit or refund allowed or made under section 6411 shall be made without regard to the provisions of subsection (a) of this section. In any such case, if the credit or refund, reduced by any deficiency in such tax thereafter assessed and by deficiencies in any other tax resulting from adjustments reflected in the determination of the credit or refund, is in excess of $2,000,000, there shall be submitted to such committee a report containing the matter specified in subsection (a) at such time after the making of the credit or refund as the Secretary shall determine the correct amount of the tax.

Miscellaneous other provisions pertaining to Form 1045 tentative carryback adjustments.

§1.172-1 – Net operating loss deduction.
§1.172-3 – Net operating loss in case of a taxpayer other than a corporation.
§1.172-4 – Net operating loss carrybacks and net operating loss carryovers.
§1.172-5 – Taxable income which is subtracted from net operating loss to determine carryback or carryover.
§1.172-6 – Illustration of net operating loss carrybacks and carryovers.
§1.172-7 – Joint return by husband and wife.