Guidance has been issued to farmers for elections related to net operating losses added by the COVID-related Tax Relief Act of 2020 (CTRA) in Revenue Procedure 2021-14.[1]  The Procedure broadly described its guidance as follows:

Specifically, this revenue procedure prescribes when and how to make an election with regard to all NOLs of the taxpayer, regardless of whether the NOL is a Farming Loss NOL. This revenue procedure also provides that a taxpayer is treated as having made a deemed election under § 2303(e)(1) of the CARES Act if the taxpayer, before December 27, 2020, filed one or more original or amended Federal income tax returns, or applications for tentative refund, that disregard the CARES Act Amendments with regard to a Farming Loss NOL. This revenue procedure further prescribes when and how to revoke an election made under § 172(b)(1)(B)(iv) or § 172(b)(3) of the Code to waive the two-year carryback period for the farming loss portion of a Farming Loss NOL incurred in a taxable year beginning in 2018 or 2019.[2]

CTRA sought to grant relief to farmers that Congress had impacted by changes meant to grant a tax benefit in the CARES Act.  Under TCJA, beginning in 2018 net operating losses could no longer be carried back generally and only could offset 80% of taxable income.  However, TCJA did allow a farm loss to be carried back two years.

The CARES Act suspended the TCJA changes until 2021 and provided for a five year net operating loss carryback unless a taxpayer elected to carry the loss forward for 2018-2020.  However, in doing so Congress, likely without really realizing it, required farmers to choose between carrying their losses back five years or carrying the loss forward.  The option to carry the loss back two years was part of the provisions suspended until 2021.

In some cases a farmer found that the five year carryback resulted in a lower refund than if the loss went back two years.  As well, most 2018 loss carrybacks (and even some 2019 ones) had already been filed by farmers by the time the CARES Act was passed in March of 2020—meaning those farmers now had to revise those carrybacks to either carry the loss back five years or elect to carry the loss forward.  The farmer did not have the option to simply accept the already filed two year carryback.

CTRA added a provision to allow farmers various options with these losses.

Election to Ignore CARES Act Changes

Section 2303(e)(1) of the CARES Act, as revised by CTRA 2020, allows a farmer to make an election for tax years beginning in 2018, 2019 or 2020 to disregard the CARES Act changes to NOLs found at CARES Act Section 2303(a) and (b) (the five year carryback).

If such an election is made, the following consequences will follow:

• Application of 80-percent limitation. The 80-percent limitation will apply to determine the NOL deduction for each taxable year beginning in 2018, 2019, or 2020 to the extent the deduction is attributable to NOLs arising in taxable years beginning after December 31, 2017. The 80-percent limitation will not apply to determine the NOL deduction for any taxable year beginning before 2018.[3]

• Application of modified taxable income rules. Section 172(b)(2)(C) of the Code, as added by the TCJA and effective prior to enactment of the CARES Act, provides a modified taxable income rule to account for the 80-percent limitation. This rule will apply with regard to each taxable year beginning in 2018, 2019, or 2020.[4]

• NOL carryback period. The NOL carryback period will be determined under § 172(b) of the Code, as amended by the TCJA and effective prior to enactment of the CARES Act, for any NOL arising in any taxable year beginning in 2018, 2019, or 2020.  For example, if a taxpayer with a Farming Loss NOL in 2018 makes the election under § 2303(e)(1), only the portion of the Farming Loss NOL that consists of a farming loss can be carried back two taxable years. In addition, for taxpayers other than insurance companies, as defined in section 816(a) of the Code, that are not life insurance companies, no portion of any NOL that does not constitute a farming loss can be carried back to any taxable year beginning before January 1, 2018.[5]

Making the Election to Ignore the CARES Act Changes

The election described above must meet the following criteria outlined in Section 2303(e) of the CARES Act as revised by CTRA 2020:

Section 2303(e)(1)(B)(i) of the CARES Act provides that, except in the case of a deemed election described in 3.02(3)(b) of this revenue procedure, an election to disregard the CARES Act amendments (Affirmative Election) under § 2303(e)(1) must be made in the manner prescribed by the Secretary. Once made, an election under § 2303(e)(1) is irrevocable. Section 2303(e)(1)(B)(ii)(I) of the CARES Act generally provides that an Affirmative Election must be made by the due date, including extensions of time, for filing the taxpayer’s Federal income tax return for the taxpayer’s first taxable year ending after December 27, 2020.[6]

The Revenue Procedure offers up both a deemed election and an affirmative election.

Deemed Election

The simplest option for returns filed before December 27, 2020 that disregarded the CARES Act revisions is to use the deemed election which requires doing nothing additional.  The Procedure provides:

In the case of any taxpayer with a Farming Loss NOL that files a Federal income tax return before December 27, 2020, that disregards the CARES Act Amendments, the taxpayer is treated as having made a deemed election (Deemed Election) under § 2303(e)(1) unless the taxpayer amends such return to reflect such amendments by the due date (including extensions of time) for filing the taxpayer’s Federal income tax return for the first taxable year ending after December 27, 2020.[7]

Affirmative Election

Other than taxpayers making the deemed election just described, a taxpayer with a Farming Loss NOL may make an affirmative election to disregard the provisions related to NOLs under the original CARES Act if

• The Farming Loss NOL arose in any taxable year of the taxpayer beginning in 2018, 2019, or 2020; and

• The taxpayer satisfies all of the following conditions:

  • The taxpayer must make the Affirmative Election on a statement described next by the due date, including extensions of time, for filing the taxpayer’s Federal income tax return for the taxpayer’s first taxable year ending after December 27, 2020.

  • The taxpayer must attach a statement to the taxpayer’s Federal income tax return for the taxpayer’s first taxable year ending after December 27, 2020. The statement must provide in type or legible writing at the top of the statement the following:

The taxpayer elects under § 2303(e)(1) of the CARES Act and Revenue Procedure 2021-14 to disregard the amendments made by § 2303(a) of the CARES Act for taxable years beginning in 2018, 2019, and 2020, and the amendments made by § 2303(b) of the CARES Act that would otherwise apply to any net operating loss arising in any taxable year beginning in 2018, 2019, or 2020. The taxpayer incurred a Farming Loss NOL, as defined in section 1.01 of Revenue Procedure 2021- 14, in [list each applicable taxable year beginning in 2018, 2019, or 2020].

The taxpayer should also attach a copy of the statement to any original or amended Federal income tax return or application for tentative refund on which the taxpayer claims a deduction attributable to a two-year NOL carryback pursuant to the Affirmative Election.[8]

Revoking an Election to Waive the Two-Year Carryback Period

The law allows a taxpayer to revoke an election made to waive the two-year carryback period under the following conditions:

Section 2303(e)(2) of the CARES Act provides taxpayers with the ability to revoke an election made under § 172(b)(1)(B)(iv) or § 172(b)(3) of the Code to waive the two-year carryback period if the election—

(i) was made by the taxpayer before December 27, 2020; and

(ii) relates to the two-year carryback period for the portion of any Farming Loss NOL that is a farming loss arising in taxable years beginning in 2018 or 2019.[9]

Special Rules for Taxpayers With Pre-December 27, 2020 Two Year Carrybacks That Were Rejected

The Procedure notes that certain taxpayers who filed for a two-year carryback prior to December 27, 2020 may have had those claims rejected by the IRS.  The Procedure provides:

If such a taxpayer wants to continue to pursue those claims, the taxpayer should submit complete copies of their rejected applications or claims,  including the original or amended Federal income tax returns for the taxable years in which the NOLs arose, in the manner set forth in this section 3.02(2), which will enable the IRS to review their cases as expeditiously as possible.

(a) The taxpayer should submit a complete copy of each rejected application for tentative refund or claim for refund based on a two-year carryback period, including the original or amended Federal income tax return for the taxable year in which the NOL arose, to the IRS Service Center at which the taxpayer previously filed the application or claim and return.

(b) The taxpayer should provide in type or legible writing at the top of the first page of a complete copy of each application or claim the following: “Deemed Election under section 3.02(2) of Revenue Procedure 2021-14.”

(c) The complete copy of each application or claim and return should be submitted on or before the due date, including extensions of time, for filing the taxpayer’s Federal income tax return for the taxpayer’s first taxable year ending after December 27, 2020.[10]

Exception to a Deemed Election

Since obtaining a deemed election simply requires doing nothing by a qualified taxpayer, the Procedure provides a method for such qualified taxpayers to escape deemed election treatment.  The Procedure provides:

A taxpayer will not be treated as having made a Deemed Election if, for each taxable year for which the taxpayer filed an original or amended Federal income tax return or an application for tentative refund that treated a Farming Loss NOL in a manner that disregards the CARES Act Amendments, the taxpayer subsequently files either an amended return by the due date, including extensions of time, for filing the taxpayer’s Federal income tax return for the taxpayer’s first taxable year ending after December 27, 2020, or an application for tentative refund within the required time for filing such an application and also by the due date, including  extensions of time, for filing the taxpayer’s Federal income tax return for the taxpayer’s first taxable year ending after December 27, 2020, that properly reflects the treatment of each Farming Loss NOL under the CARES Act Amendments.[11]

The Procedure provides the following examples of applying this provision:

Examples, Section 3.02(3), Revenue Procedure 2021-14

A taxpayer who disregarded the CARES Act Amendments by using a 2-year carryback for the farming loss portion of the taxpayer’s only Farming Loss NOL and filed Forms 1120X for the two carryback years, and who subsequently timely files a Form 1139 with a 5-year carryback that accounts for that Farming Loss NOL in a manner consistent with the CARES Act Amendments for each of the five carryback years, will not be treated as having made a Deemed Election.

Similarly, a taxpayer who filed a Form 1139 prior to December 27, 2020, and disregarded the CARES Act Amendments by using a 2-year carryback for the farming loss portion of the taxpayer’s only Farming Loss NOL and subsequently timely files a Form 1139 with a 5-year carryback that accounts for that Farming Loss NOL in a manner consistent with the CARES Act for each of the five carryback years, will not be treated as having made a Deemed Election.

Waivers of Carryback Periods

Some taxpayers may now wish to revoke their original election to not apply the two-year carryback period for farm losses.  The Procedure allows for that as well.

A taxpayer that elected not to have the two-year carryback period apply to the farming loss portion of a Farming Loss NOL incurred in a taxable year beginning in 2018 or 2019 may revoke that election if the taxpayer—

• Made that election before December 27, 2020; and

• Satisfies all of the following conditions:

  • Revocation deadline. A taxpayer must make the revocation under this provision by the date that is 3 years after the due date, including extensions of time, for filing the return for the taxable year the Farming Loss NOL was incurred and

  • Required statement. The taxpayer must attach a statement to an amended return for the loss year. The statement must provide in type or legible writing at the top of the statement the following:

    Pursuant to section 4.01 of Rev. Proc. 2021-14 the taxpayer is revoking a prior §172(b)(1)(B)(iv) or § 172(b)(3) election not to have the two-year carryback period provided by § 172(b)(1)(B)(i) apply to the Farming Loss NOL, as defined in section 1.01 of Rev. Proc. 2021-14, incurred in the taxable year.[12]

Consolidated Groups

The procedure also gives guidance for consolidated groups regarding these elections.

Manner of Making Elections for Consolidated Groups

The Procedure outlines the following manner for making an election for a consolidated group:

An Affirmative Election under section 3.01 of this revenue procedure and a revocation described in section 4.01 of this revenue procedure are made by the agent for the consolidated group. An amended return described in section 3.02(3) of this revenue procedure is filed, and a Deemed Election under section 3.02 of this revenue procedure is deemed made, by the agent for the consolidated group. See § 1.1502-77(a) and (c).[13]

Consequences of Affirmative and Deemed Elections for a Consolidated Group

The Procedure describes the consequences of the various elections for a consolidated group:

If the agent for the consolidated group makes an Affirmative Election or a Deemed Election, the consequences described in section 2.03(2) of this revenue procedure apply to the consolidated group. Therefore, for example, if a consolidated group has a CNOL a portion of which is a farming loss, and if the agent for the consolidated group makes an Affirmative Election or a Deemed Election, then the portion of the CNOL that is a farming loss can be carried back two taxable years, and the 80-percent limitation will apply to determine the deduction for the entire CNOL for each taxable year beginning in 2018, 2019, or 2020.[14]

The Procedure also provides:

Reliance on rules in § 1.1502-21 regarding application of the 80-percent limitation. If a consolidated group makes an Affirmative Election or a Deemed Election, the consolidated group may choose to apply § 1.1502-21(a), (b)(1), (b)(2)(iv), and (c)(1)(i)(E), as revised by TD 9927 (85 FR 67966, Oct. 27, 2020), for its taxable years beginning in 2018, 2019, or 2020.[15]

[1] Revenue Procedure 2021-14, June 30, 2021, https://www.irs.gov/pub/irs-drop/rp-21-14.pdf (retrieved June 30, 2021)

[2] Revenue Procedure 2021-14, Section 1.02

[3] Revenue Procedure 2021-14, Section 2.03(2)(a)

[4] Revenue Procedure 2021-14, Section 2.03(2)(b)

[5] Revenue Procedure 2021-14, Section 2.03(2)(c)

[6] Revenue Procedure 2021-14, Section 2.03(3)(a)

[7] Revenue Procedure 2021-14, Section 2.03(3)(b)

[8] Revenue Procedure 2021-14, Section 3.01(2)

[9] Revenue Procedure 2021-14, Section 2.03(4)

[10] Revenue Procedure 2021-14, Section 3.02(2)

[11] Revenue Procedure 2021-14, Section 3.02(3)

[12] Revenue Procedure 2021-14, Section 4.01

[13] Revenue Procedure 2021-14, Section 5.01(2)

[14] Revenue Procedure 2021-14, Section 5.02

[15] Revenue Procedure 2021-14, Section 5.03