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The 2017 TCJA got rid of Net Operation Loss (NOL) carry backs and instituted “silo-ing” of unrelated business activities.  The CARES Act re-instituted NOL carry backs for certain situations.  How might a 2020 net operating loss be carried back to a year prior to 2018?

SITUATION

Denali Christian College (DCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii).  They are required to file Form 990 annually.

DCC has several unrelated business activities, so show profits and others show losses.  They continue to wrestle with classifications as the recent proposed regulations have moved from 6-digit NAICS codes (1,057 “categories”) to 2-digit NAICS codes (20 “categories”).  In the year ended June 30, 2020, DCC expects to show net operating losses in several of their unrelated business activities.  Under the 2017 “Tax Cuts and Jobs Act,” this would mean that the “silo-ed” losses (for each category of activity) must remain in the respective silos with no opportunities for carrying back losses to prior years.

However, the 2020 CARES Act has a provision that amended section 172(b)(1) to provide for a carry back of any net operating loss (NOL) arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, to each of the five taxable years preceding the taxable year in which the loss arises.

DCC’s CFO called to ask us about losses generated in the year ending June 30, 2020.  “Okay, if we carry aggregate NOLs back to 2016 – prior to the TCJA and “silo-ing” – do these loss carry backs still have to be silo-ed?”

We reply.  “What a timely question.  Just this week the IRS released several FAQs about this issue.  The short answer is no if the carry back year began prior to January 1, 2018.  However, the 2020 NOLs are still required to be silo-ed for recordkeeping purposes.  Then, the siloed “CARES Act NOLs” may be carried back.  Note that the recordkeeping around the losses, carry backs, and forward effects needs to be meticulous.  We can help you with that.”

The FAQs can be found here:

https://www.irs.gov/newsroom/faqs-carryback-of-nols-by-certain-exempt-organizations

RULES

From “IRS FAQs – Carrybacks of NOLs by Certain Exempt Organizations (released 6/8/20):

Q1. In determining the UBTI of an exempt organization with more than one unrelated trade or business in a taxable year beginning after December 31, 2017, are CARES Act NOLs required to be siloed so that each unrelated trade or business calculates its NOL separately?

A1. Yes. In determining the UBTI in taxable years beginning after December 31, 2017, section 512(a)(6) requires an exempt organization with more than one unrelated trade or business to silo NOLs arising in taxable years beginning after December 31, 2017, so that each trade or business calculates its NOL separately. CARES Act NOLs arise in taxable years beginning after December 31, 2017, and therefore must be siloed.

Q2. Can an exempt organization subject to section 512(a)(6), and that has CARES Act NOLs, carry back and deduct those NOLs against the aggregate UBTI in a taxable year beginning before January 1, 2018?

A2. Yes. An exempt organization subject to section 512(a)(6) can deduct CARES Act NOLs against the aggregate UBTI in a taxable year beginning before January 1, 2018, when carrying the NOL back to such taxable year because section 512(a)(6) does not apply to such taxable year. Also, an exempt organization may carry back CARES Act NOLs attributable to an unrelated trade or business, even if the exempt organization would not have had a CARES Act NOL if the deduction in the relevant taxable year were calculated on an aggregate basis.[underline added]

BOTTOM LINE

  • Net Operating Loss calculations can be technical and foreboding.
  • The 2017 “Tax Cuts and Jobs Act” did away with NOL carrybacks and instituted the concept of “silo-ing” unrelated business activities.
  • The CARES Act reinstituted NOL carrybacks – losses after 12/31/17 and before 1/1/21 can be carried back up to 5 years.
  • The key is whether the carryback year was prior to a taxable year beginning before 1/1/18.

Specific questions? Email Dave Moja

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.

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