Editor: Anthony S. Bakale, CPA
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, signed into law on March 27, 2020, provided significant economic relief to individuals and businesses impacted by the COVID-19 pandemic. Among other things, the CARES Act revised a wide range of tax provisions that recently had been amended by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, the most comprehensive tax reform legislation in many years. This discussion focuses on how the alternative minimum tax (AMT) rules impact the net operating loss (NOL) rules under the CARES Act.
Background: The TCJA's changes to NOLs and the AMT
Prior to the TCJA, Sec. 172 provided that NOLs could be carried back two years and carried forward 20 years to offset taxable income generated in those periods.
The TCJA eliminated the carryback period (except for certain insurance company and farming losses) and replaced the 20-year carryover period with an indefinite carryover period for any NOLs arising in tax years ending after Dec. 31, 2017 (prior to a technical correction to the effective date included in the CARES Act, see below). The TCJA also limited the amount of the NOL deduction for NOLs generated in tax years beginning after Dec. 31, 2017, to 80% of taxable income.
The slight difference in the provisions' effective-date language led to an odd result for fiscal-year-end corporations that generated an NOL for a tax year beginning in 2017 and ending in 2018: The loss was subject to the new carryforward rules but not the 80% taxable income limitation.
Separately, the TCJA repealed the corporate AMT for tax years beginning after Dec. 31, 2017. Previously, corporations were subject to a 20% AMT. Any AMT paid was considered a future credit that could be carried forward indefinitely and offset future regular income tax.
Besides repealing the corporate AMT, the TCJA provided that, for tax years beginning after Dec. 31, 2017, 50% of the excess AMT credit over the allowable credit for the year was refundable. For years beginning after Dec. 31, 2020, the refundable portion of the credit was to increase to 100% for any AMT credit not utilized or refunded previously.
The CARES Act's changes to NOLs and the AMT
The CARES Act made a technical correction to align the effective dates of the NOL carryback and 80% limitation provisions. As a result, fiscal-year-end corporations with a tax year beginning in 2017 and ending in 2018 can carry back NOLs for two years. This fix was expected by most tax professionals, and its inclusion in the CARES Act was not surprising.
Also, to address businesses' immediate cash flow needs, the CARES Act modified the NOL carryback rules and the taxable income limitation on NOL deductions. The CARES Act provides for a five-year carryback of NOLs arising in tax years beginning in 2018, 2019, and 2020, and it suspended the 80% taxable income limitation on NOL deductions for those years (Secs. 172(a) and (b)). The NOL deduction for tax years beginning in 2018, 2019, and 2020 will be subject to the 80% limitation starting with tax years beginning in 2021.
Likewise, to accelerate cash flows for corporate taxpayers, the CARES Act modified the AMT credit rules. Under the CARES Act, AMT credits are 100% refundable for tax years beginning after Dec. 31, 2018. Thus, corporations can recover all of their AMT credits for tax years beginning in 2019. The CARES Act also provides that taxpayers may instead elect to claim the entire refundable credit amount in 2018 as a tentative refund by filing Form 1139, Corporation Application for Tentative Refund.
Interplay of the NOL and AMT changes
The new five-year NOL carryback rule may create some complexities for corporations because of the interplay with the AMT. In particular, the CARES Act left unclear what happens when a corporation carries back NOLs to tax years when the AMT was still in effect (prior to 2018). Can the corporation also carry back alternative tax NOLs? Before discussing the answers to frequently asked questions (FAQs) that the IRS posted on its website on May 27, 2020, it may be helpful to summarize the questions that practitioners were raising about how the five-year NOL carryback interacts with the AMT.
The main issue is this: If no alternative tax NOLs are allowed as a carryback, any reduction in regular tax due to NOL carrybacks could potentially result in an increase in AMT liability for that year. Assuming that would move income from the 35% regular corporate tax rate to the 20% AMT rate, the end result should still be a refund. However, this would not result in a full refund, which seems to be the intent of the new five-year carryback rule. The AMT paid for that prior year would then become a refundable minimum credit currently under the new CARES Act rules.
Before the FAQs were released, some taxpayers might have assumed that their alternative tax NOL equals their regular tax NOL. Under Sec. 56(d), the calculation of alternative tax NOLs starts with the regular tax NOL and is adjusted for various items. Taxpayers may have believed that a quasi-alternative tax NOL calculation would be allowed under the new rules. If allowed, the 90% alternative tax NOL limitation for pre-TCJA years would also have to be included in the analysis.
Ultimately, under either scenario, one would expect the net cash result to be the same because the CARES Act made AMT credits currently refundable. Perhaps that is why the drafters of the CARES Act ignored the issue of AMT loss carrybacks. However, the act left the exact process unclear. The biggest consideration might be the impact of the NOL and AMT interplay on timing and process. If an NOL carryback results in a higher AMT liability in a prior carryback year, the question arises: Could this delay current filings for AMT refunds as the finalized minimum credits are pending an NOL carryback filing?
Guidance in the IRS FAQs
The IRS provided much-needed clarification of these matters in the May 27 FAQs, which address the forms, timeline, and procedural details concerning NOL carrybacks and refundable minimum credits ("Questions and Answers About NOL Carrybacks of C Corporations to Taxable Years in Which the Alternative Minimum Tax Applies").
The IRS confirmed that no alternative tax NOL should be treated as arising in post-TCJA years. This guidance applies when filing Form 1120X, Amended U.S. Corporation Income Tax Return, or Form 1139, Corporation Application for Tentative Refund, on or after June 1, 2020. No action need be taken for any fillings prior to June 1, 2020, that did not follow this rule unless contacted by the IRS, according to the FAQs.
For filings on or after June 1, 2020, the IRS will allow corporate taxpayers to claim both an AMT credit refund and an NOL carryback on the same Form 1139. The corporation must elect to claim 100% of its refundable minimum tax credits under Sec. 53(e)(5). If the corporation is eligible for minimum tax credits under any other section, it must separately file Form 1120X, and not Form 1139. The FAQs page provides additional procedural details and deadlines relating to forms and elections, and clarifies next steps for corporate taxpayers under various circumstances.
Waiving the carryback
In certain situations, it may be desirable to waive the NOL carryback. Prior to the TCJA's enactment, corporations were subject to a graduated corporate tax rate structure with a maximum tax rate of 35%. The TCJA changed the corporate tax rate to a flat 21% for tax years beginning after Dec. 31, 2017. While the CARES Act now provides for a five-year NOL carryback, corporate taxpayers should consider their past tax rates when deciding to carry back. If a corporation paid tax at a rate lower than 21% in the past, an NOL carryback may not result in larger overall tax savings as compared to an NOL carryover. The decision is then between current cash flow needs and maximum tax cash savings over time.
Corporate taxpayers may elect to waive the five-year carryback period for any of these years; however, the election is irrevocable. Additionally, taxpayers may elect to exclude Sec. 965 transition tax years from the carryback period.
Timing is key
Accelerating cash, as intended by the CARES Act, may be complicated for taxpayers with NOL carrybacks to prior years with AMT. While the changes are very taxpayer-friendly, the new five-year NOL carryback rule has the potential to shift significant amounts of regular corporate tax into minimum tax credits. Carrybacks may need to be filed first in order to finalize AMT credits available for a refund in current filings under certain circumstances. The timing and appropriate forms, as discussed in the May 27 FAQs, should be carefully considered by any corporation looking for quick refunds.
Anthony Bakale, CPA, is with Cohen & Company Ltd. in Cleveland.
For additional information about these items, contact Mr. Bakale at firstname.lastname@example.org.
Contributors are members of or associated with Cohen & Company Ltd.