United States:
How A Corporation Can Request A Federal Income Tax Refund
13 May 2020
Ropes & Gray LLP
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The Coronavirus Aid, Relief, and Economic Security Act (CARES
Act), commonly referred to as Phase 3 of the federal
government's response to the coronavirus outbreak, was enacted
on March 27, 2020. See Ropes & Gray Alerts on CARES Act, and certain key tax provisions of CARES Act. The
CARES Act created opportunities for corporations to receive tax
refunds that otherwise may not have been available, and the chart
below describes certain procedures by which corporations can
request such refunds (subject to the notes below).
NOTE: The IRS recommended on April 8 that
taxpayers await further instruction from the IRS before utilizing
traditional processes to claim refunds under the CARES Act.
Additional information will be posted to irs.gov in the coming
days.
Updated 4/13/20 -- The IRS announced temporary
procedures to accept FAX transmissions of
tentative refund claims (Form 1139), but at this time the IRS has
not identified any other corporate forms. https://www.irs.gov/newsroom/temporary-procedures-to-fax-certain-forms-1139-and-1045-due-to-covid-19
Updated 4/21/20 -- The IRS issued guidance
setting forth the methods to obtain refunds or credits for a
taxpayer that placed "qualified improvement property"
into service after Dec 31, 2017. (Rev. Proc. 2020-25)
Updated 4/30/20 – The IRS confirmed in a
webinar that Notice 2020-26 applies to consolidated corporations in
addition to stand-alone corporations.
Updated 6/18/20 – Clarifying Form 1139
due dates regarding groups of consolidated corporations.
Updated 7/9/20 – The IRS released
temporary regulations providing flexibility for waiving carryback
periods for consolidated NOLs.
How can a corporation get a refund for the 2018 or 2019
tax year (i.e., paid more tax than was due)?
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Not yet filed federal income tax return:
- Quick refund (Form 4466)
- Generally, available to taxpayers who
have overpaid estimated taxes in the current year by at least 10%
of the expected liability, and at least $500.
- Generally, due after the end of the
corporation's tax year, and not later than the due date for
filing the corporation's tax return (not including
extensions).
- Notice 2020-23 extends the filing
deadline to July 15, 2020 for a Form 4466 that would otherwise have
to be filed on or after April 1, 2020, such as for calendar year
2019.
- Must be filed before the corporation
files its federal income tax return for the year.
- IRS will make a determination within
45 days from the date application is filed.
Already filed federal income tax return:
- Amended Return (Form 1120X)
- Must be filed within three years
after the date the corporation filed its original return, or within
two years after the date the corporation paid the tax (if filing a
claim for a refund), whichever is later.
- Prior to the COVID-19 pandemic, it
would typically take three to four months for the IRS to process
Form 1120X.
- The IRS has clarified in Rev. Proc.
2020-25 that an amended return is one of two available avenues for
a taxpayer to retroactively obtain the benefit of immediate
expensing of "qualified improvement property."
- Form 3115 (Change in accounting
method)
- Generally, under Rev. Proc. 2020-25,
a taxpayer that placed "qualified improvement property"
(QIP) into service during prior years may file for an accounting
method change to obtain the benefit of a corresponding section
481(a) adjustment during the current taxable year, rather than in
the applicable prior year(s).
- A corporation may use this approach
to capture the prior-year benefit of treating the QIP as 15-year
depreciable property that qualifies for 100% bonus depreciation
rather than 39-year property.
- Under Rev. Proc. 2020-25, Form 3115
would be automatically accepted by the IRS.
- During a webcast on 4/27/20, the IRS
said taxpayers who already filed 2019 tax returns could amend the
2019 return with an accounting method change, rather than wait for
a 2020 tax return or amend two tax returns. This option would have
to be executed within six months of the 2019 return filing.
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How does a calendar-year corporation carry back NOLs
under the CARES Act?
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- First, file a corporate tax return
(Form 1120) for the year from which NOLs are to be carried
back.
- Second, file one of the following:
- Tentative Refund (Form 1139)
- Notice 2020-26 granted an additional
6 months to file Form 1139 making the new deadline no later than 18
months after the close of the taxable year in which an NOL arose
for years beginning during the 2018 calendar year and ending on or
before June 30, 2019. The IRS has confirmed that the Notice 2020-26
time extension also applies to consolidated corporations. For years
ending after June 30, 2019, the form is due 12 months after the
close of the year.
- When a corporation joins a group of
consolidated corporations, the 12 month (or 18 month as applicable)
deadline to file begins at the end of the full tax year of the
acquiring group of consolidated corporations (not from the end of
the short year triggered by joining the group).
- New regulations make it easier for a
consolidated group of corporations that acquire a corporation from
another consolidated group to waive carrying back NOLs to years of
the acquired corporation prior to the acquisition. Whereas a
split-waiver election of this type previously had to be filed with
the return for the year the corporation joined the consolidated
group, the election can now be filed with the return for the year
in which the NOL arises. See Section 1.1502-21T as
revised.
- IRS is required, to the extent
practicable, to make a limited examination of the refund claim
within 90 days of filing the application, but IRS has expressed
doubt about whether 90 days will be practicable under current
circumstances.
- IRS retains the right to subsequently
conduct a full audit, which means the taxpayer could have to return
the refund.
- IRS announced that it will accept
FAXED applications of Form 1139 beginning on
4/17/20.
- Amended Return (Form 1120X)
(described above).
- Special rules apply to certain
non-calendar year taxpayers and taxpayers with foreign subsidiaries
that have income inclusions resulting from the Section 965 toll
charge imposed by the 2017 TCJA. These rules are not discussed
here.
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What if a corporation desires not to carry back
NOLs?
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- Taxpayers can elect not to carry back
NOLs.
- Rev. Proc. 2020-24 describes the
irrevocable election made by attaching a separate statement for
each year being waived (2018, 2019, or both) to the taxpayer's
federal income tax return for the first taxable year ending after
3/27/2020.
- The statement must say that the
taxpayer is electing to apply Section 172(b)(3) under Rev. Proc.
2020-24 and the taxable year for which the statement applies.
- A separate decision on whether to
waive the carryback can be made for each year in which NOLs
arise.
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Originally Published 17 April, 2020
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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