Treasury and the IRS recently released temporary and proposed regulations under Section 1502 (the 2020 Temporary Regulations and 2020 Proposed Regulations, respectively) that provide guidance to consolidated groups in a number of areas relating to the computation of the consolidated net operating loss (CNOL) deductions. Amendments to Section 172 enacted under the Tax Cuts and Jobs Act and the CARES Act materially impacted the rules regarding net operating loss (NOL) utilization for NOLs arising in tax years beginning after December 31, 2017. When a consolidated group (the Acquiring Group) acquires a member (the acquired member) from another consolidated group, the consolidated regulations provide the Acquiring Group with an election to relinquish pre-acquisition years of the acquired member for CNOL carryback purposes. The 2020 Temporary Regulations grant Acquiring Groups with post-2017 CNOLs additional annual elections for retroactively waiving some or all of the portion of the 5-year extended carryback period of an acquired member that includes the acquired member’s pre-acquisition years. In addition, the 2020 Proposed Regulations represent an effort by Treasury and the IRS to provide substantive rules implementing Section 172, as amended by the TCJA and the CARES Act, within the consolidated group.
The 2020 Temporary Regulations provide much-needed relief for acquiring consolidated groups that as a practical matter would not have considered a split-waiver election for NOLs arising in the 2018, 2019, and 2020 tax years. This relief allows acquiring consolidated groups to take affirmative steps to preserve the expectations of the parties to acquisitions in these years via the Additional Elections. However taxpayers must quickly assess whether to make an Additional Election due to the November 30, 2020 filing deadline for these years.
The 2020 Proposed Regulations provide insight into the current thinking of Treasury and the IRS regarding the implementation of the 80-percent taxable income limitation and other TCJA and CARES Act amendments to Section 172 within a consolidated group. These regulations are proposed and therefore consolidated taxpayers may consider other reasonable methods for implementing Section 172 for tax years beginning before the date the regulations are adopted as final. Consolidated taxpayers must consider whether to affirmatively apply any aspect of the 2020 Proposed Regulations to tax years beginning prior to finalization as this would require consistent application of the regulations as a whole.
National Tax Services and Mergers & Acquisitions Tax Leader, PwC US