After the Coronavirus Aid, Relief and Economic Security (CARES) Act came into effect in March 2020, a number of tax provisions that were previously amended under the Tax Cuts and Jobs Act (TCJA) were subsequently revised. Alternative minimum tax (AMT) rules have also been amended as they relate to NOLs.
What originally changed under the TCJA?
Prior to the TCJA amendments, net operating losses (NOLs) could be carried back two years and forward 20 years to offset taxable income in those time periods. The TCJA eliminated the carryback period (with an exception to some insurance and farming losses) and instated an indefinite carryover period for any NOLs in tax years ending after December 31, 2017. There was also a limitation added to the amount of NOL deduction for NOLs generated after this date, to 80% of taxable income.
Additionally, the TCJA repealed the corporate AMT (previously 20%) for tax years beginning after December 31, 2017. For tax years beginning after this date, 50% of the excess AMT credit over the allowable credit for the year was refundable and this was increased to 100% for years beginning after December 31, 2020.
How has this changed under the CARES Act?
The CARES Act provided a technical correction to the effective dates of the NOL carryback and 80% limitation in order for both amendments to align correctly. Fiscal-year-end corporations with a tax year beginning in 2017 and ending in 2018 are now able to carryback NOLs for two years.
To provide businesses with immediate cash flow, the CARES Act also implemented a five-year carryback of NOLs in tax years beginning in 2018, 2019 and 2020; the 80% taxable income limitation has also been suspended on NOL deductions in these years. The 80% limitation will be reinstated for tax years beginning in 2021.
AMT credit rules have also been updated under the CARES Act. AMT credits are now 100% refundable for tax years beginning after December 31, 2018 and corporations are able to recover all of their AMT credits for tax years beginning in 2019. Taxpayers may choose to claim their entire 2018 refundable credit as a tentative refund using the Corporate Application for Tentative Refund (Form 1139).
How do the new AMT rules work with updated NOL rules?
There has been some confusion over how the new AMT rules and NOL rules work together for corporations who carryback NOLs to tax years where the AMT was still in effect. Specifically, if no alternative tax NOLs are allowed as carryback, a reduction in regular tax due to NOL carrybacks could result in a potential increase in AMT liability for that tax year. Although this should still result in a refund, it would potentially not result in a full refund (which is assumed to be the intention of the five-year carryback rule under the CARES Act). If this is the case, the AMT paid for the prior year would become a refundable minimum credit.
The IRS provided clarification via FAQs in May 2020 to address forms, timelines and procedural information as it relates to NOL carrybacks and refundable minimum credits. This confirmed that no alternative tax NOL should be treated as arising in post-TCJA years and applies when filing the Amended U.S. Corporation Income Tax Return (Form 1120X) and Form 1139 on or after June 1, 2020. No action needs to be taken for filings before June 1, 2020 that did not follow this rule.
For filings on or after June 1, 2020, the IRS has stated that corporate taxpayers should claim both AMT credit refund and a NOL carryback on Form 1139. Corporations must claim 100% of their refundable minimum tax credit at this point. If a corporation is eligible for minimum tax credits under any other section, Form 1120X should be filed instead of Form 1139.
Some corporation may choose to waive the NOL carryback. Prior to TCJA, corporations were subject to a graduated tax rate structure with a cap of 35%. TCJA revised this to a 21% flat rate for tax years beginning after December 31, 2017. Although the CARES Act has increased carryback to five years, taxpayers should consider prior years’ tax rates when deciding to carryback or not. If a corporation paid tax at a rate lower than 21% in previous years, a NOL carryback may not result in a larger overall tax saving compared to a NOL carryover. A decision should be made based on immediate cash flow needs vs. maximum tax cash savings over time.
If you have questions about this guidance, contact the team at BSSF today!
Disclaimer: This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our Firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.