Editor: Valrie Chambers, CPA, Ph.D.
The spread of the novel coronavirus (COVID-19) across the world has quickly disrupted economies, supply chains, and trade. Otherwise healthy businesses now face a tax year potentially mired in losses and in an urgent need for cash.
Finance departments should consider what can be done from a tax perspective to stabilize balance sheets. This discussion explores certain basic planning and compliance strategies in the wake of COVID-19 and legislation enacted in late March, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136.
The CARES Act is the largest economic stimulus legislation in history, with a nearly $2 trillion price tag. A majority of that cost is related to direct payments to businesses, states, and municipalities, as well as certain industries, such as air travel and cargo and health care and administration. Almost $600 billion of this stimulus is attributable to tax cuts (Joint Committee on Taxation (JCT), Estimated Revenue Effects of the Revenue Provisions in the CARES Act (JCX-11-20) (March 26, 2020)).
A large portion of those cuts is aimed directly at individuals through the recovery rebates, which are direct payments of $1,200 per person and $500 for each qualifying child. Those payments are subject to phaseouts that begin at $75,000 for a single filer or $150,000 for joint filers. Businesses can also take advantage of substantial favorable tax provisions included in the new law, such as:
- Employee retention credit;
- Delay of payment of the employer portion of payroll taxes;
- Allowing net operating losses (NOLs) arising in 2018, 2019, and 2020 to be carried back five years and suspending the 80% taxable income limitation (which had been enacted by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97);
- Allowing corporations to accelerate alternative minimum tax (AMT) credit refunds into 2018 or 2019;
- Suspending 2020 funding obligations for single-employer defined benefit pension plans until Jan. 1, 2021 (with interest due);
- Increasing the limitation on the deduction of business interest under Sec. 163(j) from 30% to 50% of adjusted taxable income for tax years beginning in 2019 and 2020 and allowing taxpayers to use 2019 taxable income to calculate the 2020 limit;
- A technical correction to allow for bonus depreciation for qualified improvement property; and
- Suspending the limitation on excess business loss deductions under Sec. 461(l) in 2018, 2019, and 2020, so that it takes effect for the first time in 2021.
Beyond these particular provisions, businesses should consider the following tried-and-true refund strategies.
Quick refunds on Form 4466
Sec. 6425 allows a corporation to adjust its overpayment of estimated income tax. Businesses often overpay their estimated tax during a tax year and then apply that overpayment to the subsequent year's first quarter as a credit elected under Sec. 6402(b). Otherwise, the business could claim a refund of that overpayment when it files its income tax return, which could be as late as Oct. 15 and likely take several weeks after filing to receive.
A business in this situation — and there are many — may not want to wait until it files its income tax return to claim a refund. Filing Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, is one way to receive the overpayment faster.
To obtain this quick refund, the corporation's overpayment must be at least $500 and at least 10% of the expected tax liability. The corporation must also act quickly. Form 4466 must be filed no later than the due date for filing the corporation's income tax return, not including extensions. For calendar-year taxpayers, this year that's July 15, thanks to Notice 2020-23, which postponed a whole host of filing deadlines.
The application must be paper-filed, and the IRS then has 45 days to act. Any application that contains material errors or omissions that cannot be corrected within 45 days may be disallowed, leaving the taxpayer to claim a refund on its income tax return. Taxpayers should also be careful they estimate their overpayment correctly. Overestimating a quick refund can lead to an underpayment penalty.
Tentative refunds on Form 1139 or 1045
Under Sec. 6411, a taxpayer may file an application for a tentative carryback adjustment of the tax for a prior tax year that is affected by an NOL carryback, a business credit carryback, or a capital loss carryback.
The TCJA eliminated carrybacks for NOLs arising in tax years ending after Dec. 31, 2017, and limited the NOL deduction for losses arising in tax years beginning after Dec. 31, 2017, to 80% of taxable income. The CARES Act reinstates and beefs up the NOL carryback by allowing a five-year carryback for losses arising in tax years beginning in 2018, 2019, and 2020.
The CARES Act also corrects a technical error in the TCJA that prevented NOLs arising in a tax year ending in 2018 from being carried back. Taxpayers that have an NOL arising in a fiscal year beginning in 2017 and ending in 2018 may file a tentative refund claim or make an election to waive a carryback within 120 days of the March 27, 2020, enactment of the CARES Act to carry back those losses two years.
Finally, the CARES Act allows corporations to immediately claim unused AMT credits. The TCJA had repealed the corporate AMT and provided that any unused AMT credits could be claimed as refundable credits over the four tax years beginning in 2018, 2019, 2020, and 2021. The CARES Act provides that the credits can be claimed fully in tax years beginning in 2018 and 2019.
Under the CARES Act, a corporation can elect to take the entire refundable AMT credit in 2018, rather than claim the remaining half of the credit in 2019. If a corporation wishes to claim the balance of the credit in 2019, it can do so on its income tax return. If the corporation wishes to claim the entire credit in 2018, it can either file an amended return for 2018 or file for a tentative refund on Form 1139, Corporation Application for Tentative Refund.
Taxpayers commonly file Form 1139 or Form 1045, Application for Tentative Refund, to claim a tentative refund based on an NOL carryback. Form 1139 or 1045 must generally be filed within one year following the close of the taxpayer's tax year and after the taxpayer files its income tax return for the year in which the loss arose. In Notice 2020-26, the IRS postponed the due date for filing Form 1139 or 1045 for an NOL that arose in a tax year that began in 2018 and ended on or before June 30, 2019, to six months after the normal due date of the form (e.g., June 30, 2020, for a tax year ended Dec. 31, 2018). Once the form is filed, the IRS has 90 days to conduct a limited examination or review of the application for omissions or errors and allow or deny the application. Taxpayers should note the temporary procedures the IRS has put into place to allow faxing of Forms 1139 and 1045 filed to claim AMT credit refunds and to carry back NOLs.
Importantly, a tentative refund claimed on Form 1139 or 1045 is not immediately subject to the rules of Sec. 6405, which prohibits the IRS from issuing a refund of a certain size before making a report to the JCT. So-called Joint Committee refunds must exceed $2 million for individuals and $5 million for corporations. Credits or refunds allowed or made under Sec. 6411 may be paid without the IRS's referring the refund to the JCT (Sec. 6405(b)).
However, the fact that the IRS may make a tentative refund exceeding the statutory limit of $2 million or $5 million does not mean it cannot examine the ultimate refund claim. Claims filed on Form 1139 or 1045 are tentative (as the name suggests). The IRS can, and will, examine large claims, even after they are paid.
Finally, while this discussion provides a general overview of the refund mechanisms available to taxpayers, taxpayers should carefully analyze specific issues and ensure they are compliant with their filings, based on the most up-to-date IRS guidance in response to the CARES Act.
Extensions of time to pay tax by a corporation expecting an NOL carryback
This year is likely to be a tough one for many businesses, and it is not unreasonable to expect an overall loss. Sec. 6164 allows a corporation anticipating a current-year loss to file Form 1138, Extension of Time for Payment of Taxes by a Corporation Expecting a Net Operating Loss Carryback, to extend the time for payment of tax for the immediately preceding tax year.
Form 1138 is a powerful tool to assist a corporation in staying liquid during a downturn. Ordinarily, a company incurring a current-year loss would need to wait until the end of the tax year to file a return to claim a refund. By filing Form 1138, the 2019 tax liability ordinarily due by the unextended due date for the 2019 return may be paid by the last day of the month of the 2020 filing deadline, including extensions, if Form 1138 is timely filed. Form 1138 is due before the tax for the preceding year is required to be paid. There appears to be a reasonable position that taxpayers could view July 15 as the due date for filing Form 1138, but the issue is not free from doubt. However, if Form 1139 is filed on or before termination of the extension granted under Form 1138, then the payment period is further postponed to the date that the IRS notifies the taxpayer that Form 1139 had been allowed or disallowed.
Post-COVID-19 tax policy
The tax landscape post-COVID-19 remains to be seen. The economic impact in the short term has been significantly greater than previous recessions, and it is likely Congress will grapple with the fallout for years to come. These strategies should, hopefully, serve taxpayers for the foreseeable future as a tried-but-true way to free up cash, but they are by no means the only strategy a competently advised taxpayer should undertake.
Contributors Valrie Chambers, CPA, Ph.D., is an associate professor of accounting at Stetson University in Celebration, Fla. Shamik Trivedi, J.D., LL.M., is a senior manager, IRS practice, procedure, and regulatory services, and Dustin Stamper, E.A., is the tax legislative affairs leader, both in the National Tax Office of Grant Thornton LLP in Washington. Ellen Martin, CPA, is Grant Thornton’s national tax leader, Strategic Federal Tax Services, also in Washington. Mr. Trivedi is a member of the AICPA IRS Advocacy and Relations Committee. For more information on this article, contact email@example.com.
Valrie Chambers, CPA, Ph.D., is an associate professor of accounting at Stetson University in Celebration, Fla. Shamik Trivedi, J.D., LL.M., is a senior manager, IRS practice, procedure, and regulatory services, and Dustin Stamper, E.A., is the tax legislative affairs leader, both in the National Tax Office of Grant Thornton LLP in Washington. Ellen Martin, CPA, is Grant Thornton’s national tax leader, Strategic Federal Tax Services, also in Washington. Mr. Trivedi is a member of the AICPA IRS Advocacy and Relations Committee. For more information on this article, contact firstname.lastname@example.org.