NOL Carryback impacting PAL carryover

Hi everyone, I have read through some old posts, mostly on TaxAlmanac but unfortunately a few of the old posts are inaccessible. Anyway I have a client who sold a rental in 2019 and since he was retired and the property was worth significantly less than purchased for, we have a ~$16k NOL to carryback to 2014.

In 2014, the NOL carryback reduces AGI and thus allows more of the $25k active PAL to be used in 2014. On the original return he had a PAL of $15k of which ~$7k was allowed in 2014 and $8k carried over to 2015 when it was fully utilized. With the NOL carryback, the PAL allowed in 2014 becomes nearly $15k with just a few hundred to carryover to 2015. However that'd give a deduction in 2014 that was already taken in 2015.

It seems like I have the following options:
1) Adjust the MAGI on 1045 to ignore the increase to the PAL deduction so as to not impact the carryover to 2015.
2) Fully allow the increase PAL in 2014 which will give a larger refund in 2014. Then amend 2015 on 1040X and he'd pay tax. This doesn't seem correct given penalties would apply and the year is closed anyway.
3) Reflect a larger decrease in tax in 2014 (~$6k) on Form 1045 and then in year two column show an increase in tax (~$2k) so that the two years net together to be the "true" decrease in tax.

Any insight is appreciated!

Option 2 is correct. There wouldn't be penalties.
I wouldn't do this much work for a $14K NOL. I'd carry it forward.

Just to add to what sjrcpa says, in Rev. Proc. 2020-24, the IRS extended the deadline to April 15, 2021 to make the election to waive the carryback period for an NOL sustained in either 2018 or 2019.

Option 2 is correct. There wouldn't be penalties.
I wouldn't do this much work for a $14K NOL. I'd carry it forward.

So you're saying do 1045 to receive the increased refund and then amend 2015 using 1040X to show an increase in tax? Do you include the 1040X in the same mailing? Mail separately noting the reason for the amended return? Another issue will be that for state purposes, the carryback is not likely to be allowed. Sounds like you've had this issue before?

I'd agree and would just carryforward but the guy is retired now and won't have much income. So he's far better carrying back to a year with a 25% marginal tax rate than carrying forward for 10% benefit. He'll get back ~$4500.

I'll be charging a decent amount to make it worth my while.

I wouldn't do this much work for a $14K NOL. I'd carry it forward.

Agree!

I'll be charging a decent amount to make it worth my while.

Exactly. It's not about what's best for you. It's about what's best for your client. He can lose a large chunk of the tax benefit to you for your fees, or you could just carry the loss forward, and he will receive the full tax benefit of the NOL, without reduction for your fees.

I haven't had this exact issue before, but I remember having to recompute investment tax credits in intervening years due to NOL carrybacks. I just did one (two-2018 and 2019 NOL carrybacks) where AMT and Minimum Tax Credits were involved. This was for a 6 figure refund, though.
If I was doing the 2019 NOL carryback I think I'd use 1045 and fax it.
Then do the 1040X and mail it.

I wouldn't do this much work for a $14K NOL. I'd carry it forward.

Agree!

I'll be charging a decent amount to make it worth my while.

Exactly. It's not about what's best for you. It's about what's best for your client. He can lose a large chunk of the tax benefit to you for your fees, or you could just carry the loss forward, and he will receive the full tax benefit of the NOL, without reduction for your fees.

Sorry if that was unclear. His income is only SS now until 72. He could generate tax free income now by doing IRA conversion but I ran analysis and it would save $1500-2k+ more after tax prep costs to carry back vs doing carry forward.