IRS Form 1138 Guide: NOL Carryback Payment Extension

Introduction – What is Form 1138?

Form 1138, titled Extension of Time for Payment of Taxes by a Corporation Expecting a Net Operating Loss Carryback, is an official IRS form. It allows a C corporation that expects to incur a net operating loss (NOL) in its current tax year to extend the payment deadline for unpaid income taxes from the immediately preceding tax year.

The Internal Revenue Service (IRS) governs Form 1138 under Internal Revenue Code Section 6164. By submitting this form, a struggling corporation can preserve vital working capital when it anticipates that a current-year loss will offset prior-year tax obligations.

Purpose of the Form

When a corporation suffers a net operating loss, tax law often permits the company to carry that loss back to prior tax years to offset previously taxed income, resulting in a tax refund. However, standard tax payments for the prior year may come due before the current loss year officially ends.

Form 1138 solves a critical cash flow problem:

• It eliminates the need for a corporation to pay unpaid taxes for Year 1 when it knows a Year 2 loss will wipe out that tax liability.
• It defers the payment deadline until the corporation can finish Year 2 and formally claim its refund using Form 1139 or Form 1120-X.
• It preserves cash flow during periods of business distress or economic downturns.

Who Needs to File This Form

Form 1138 is designed specifically for corporate filers. A business should file Form 1138 if it meets all of the following conditions:

• It is a C corporation filing Form 1120.
• It expects to incur a net operating loss (NOL) in the current tax year.
• It has an unpaid federal income tax liability for the immediately preceding tax year.
• The expected NOL carryback will reduce the unpaid tax liability for that preceding tax year.

Who Is Exempt / Not Required to File

Not all business entities can or should file Form 1138. Exemptions and non-applicability include:

• S Corporations: Pass-through entities do not pay corporate-level income tax; net losses pass directly through to individual shareholders on Schedule K-1.
• Corporations with Fully Paid Taxes: Businesses that have already paid all tax liabilities for the preceding tax year cannot use Form 1138 (they must wait to file Form 1139 for a refund after the loss year ends).
• Partnerships and Sole Proprietorships: Unincorporated businesses and individual taxpayers do not file Form 1138.
• Corporations Without an Expected Loss: Companies that project profitable current-year operations.

When to File

Timing is critical when filing Form 1138. The form must be submitted **during the current tax year** in which the corporation expects the net operating loss to occur.

Specifically, Form 1138 must be filed **before the unpaid tax for the preceding tax year becomes due**. Filing Form 1138 extends the payment deadline until the last day of the month in which the corporate tax return for the loss year is due (including extensions), or until the IRS acts upon a tentative carryback refund application (Form 1139).

Where and How to File

Form 1138 can be filed on paper or electronically through IRS-approved tax software alongside corporate return extensions.

If filing a paper application, send Form 1138 to the IRS service center where the corporation files its annual Form 1120 income tax return. Refer to the official IRS address as per instructions for Form 1120 based on the corporation’s primary business location.

Step-by-Step Instructions to Fill the Form

Form 1138 is a concise, one-page document that requires simple calculations and financial projections for the current loss year.

Form 1138 Line Breakdown

Line Item	Field Title	Description and Filing Instructions
Line 1	Loss Year Ending Date	Enter the ending date of the current tax year in which the net operating loss (NOL) is expected to occur.
Line 2	Expected NOL Amount	Enter the projected dollar amount of the net operating loss expected for the current tax year.
Line 3	Expected Tax Reduction	Calculate and enter the expected reduction in prior-year tax resulting from the NOL carryback.
Line 4	Amount of Tax Extended	Enter the unpaid tax amount for the preceding tax year for which payment is being extended. Cannot exceed Line 3.
Line 5	Explanation of Loss	Provide a narrative explanation of the facts, conditions, and operational circumstances expecting to cause the loss.

Required Documents/Information Needed Before Filling

Before completing Form 1138, gather the following financial projections and historical tax returns:

• Copy of the preceding year’s Form 1120 showing unpaid income tax liabilities.
• Current-year interim financial statements (Income Statement and Balance Sheet).
• Pro-forma tax projections supporting the estimated current-year net operating loss amount.
• Worksheets calculating the estimated tax reduction for prior carryback years.

Common Mistakes to Avoid

Errors on Form 1138 can result in immediate rejection, leading to unexpected IRS collection notices. Common mistakes include:

• Filing After the Payment Due Date: Submitting Form 1138 after the prior year’s tax payment deadline has already passed.
• Overextending the Extended Tax Amount: Requesting a payment extension on Line 4 that exceeds the calculated tax reduction on Line 3.
• Failing to Follow Up with Form 1139: Forgetting to file Form 1139 (Corporation Application for Tentative Refund) after the loss year ends to formally apply the NOL carryback.
• Vague Explanations on Line 5: Leaving Line 5 blank or providing inadequate reasons for the projected operating loss.

Penalties for Non-Filing or Errors

Filing Form 1138 defers tax payments, but it does not eliminate statutory interest. The IRS charges interest on all deferred tax payments from the original due date until the tax is satisfied by the NOL carryback or paid in cash.

Furthermore, if a corporation significantly overestimates its expected NOL and the actual loss turns out to be much smaller, a 5% penalty under Section 6655 may apply to the portion of extended tax that was not offset by an actual carryback.

Related Forms or Schedules

Form 1138 is part of the corporate net operating loss and refund process and interacts with several related IRS forms:

• Form 1120 (U.S. Corporation Income Tax Return)
• Form 1139 (Corporation Application for Tentative Refund)
• Form 1120-X (Amended U.S. Corporation Income Tax Return)
• Form 7004 (Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns)

Frequently Asked Questions

What is the difference between Form 1138 and Form 1139?

Form 1138 is filed during the loss year to delay paying taxes for the prior year. Form 1139 is filed after the loss year ends to formally apply the net operating loss carryback and claim a tentative tax refund.

Does filing Form 1138 eliminate the tax owed permanently?

No. Form 1138 only provides a temporary extension of time to pay. The tax is only satisfied once the actual NOL is verified and applied on Form 1139 or Form 1120-X after the loss year ends.

Does interest accrue during the Form 1138 payment extension?

Yes. Federal law requires the IRS to charge interest on extended tax payments from the original payment due date until the loss carryback is formally processed.

Can an S corporation file Form 1138?

No. S corporations are pass-through entities and do not pay corporate-level income taxes. Net operating losses pass through to individual shareholders on Schedule K-1.

What happens if the actual loss is smaller than estimated on Form 1138?

If the actual NOL is less than projected, the payment extension terminates for the unpaid portion, and the corporation must pay the remaining tax balance plus accrued interest immediately.

How long does the payment extension under Form 1138 last?

The extension lasts until the end of the month in which the corporate tax return for the loss year is due (including extensions), or until the IRS acts on a Form 1139 tentative refund application.

Conclusion – Key Takeaways

Form 1138 is a valuable cash flow preservation tool for C corporations facing financial losses. Key takeaways include:

• Extends payment of prior-year corporate income tax when expecting a current-year net operating loss.
• Must be filed during the current loss year before the prior year’s tax payment deadline.
• Preserves corporate cash flow without requiring immediate payment followed by a refund claim.
• Does not stop statutory interest from accruing on extended tax balances.
• Must be followed up by filing Form 1139 once the loss year ends.