Am I Stuck with 5 Year Carryback on Farm Net Operating Losses?

We got the following question from a reader:

New farmer client had a $238,000 NOL in 2019. Five year carryback to 2014 and 2015 generates only $1,562 tax refund. Not a lot of income tax was paid in those years. Co-operative DPAD of $100,000 in 2014 and $130,000 in 2015 eats up all the NOL to prevent it from carrying forward into more recent years with higher tax and less DPAD.

Is there any way a farmer can elect to use the two year carryback available before the CARES Act? My research says no – five years is mandatory. Am I missing something?

We would be much better off to carryforward than carryback to 2014 and 2015.

As the reader mentions, the CARES Act put in place a mandatory 5 year carryback for all net operating losses (NOL) including a farm NOL.  As the reader’s example shows, carrying back a $238,000 farm NOL five years to get a $1,562 refund is not very efficient.  This is likely a dairy since they normally received a large amount of DPAD from a cooperative.

However, the Consolidated Appropriations Act (CAA) passed late in 2020 has a new provision strictly for farmers.  This provision allows them to:

• Carry back a farm net operating loss five years, or
• Elect to carry back a farm net operating loss two years, or
• Elect to carryforward a 2018 – 2020 net operating loss.

However, we have not seen the formal guidance from the IRS yet on how to formally make the election to carry the loss back two years or how to “unelect” the NOL loss carryforward that may have already been made on either the 2018 or 2019 return.

Remember, if you have both a farm and a regular NOL, you must carryback the non-farm NOL five years or elect to carry it forward.  You cannot carry that NOL back two years.

We would expect this guidance any day and we will provide an update then.