The CARES Act, signed into law on March 27, 2020, provides significant economic relief to individuals and businesses impacted by the COVID-19 pandemic. To address businesses’ immediate cash flow needs, the Act revises the net operating loss (NOL) and alternative minimum tax (AMT) rules. Specifically, it:
- Provides for a five-year carryback of NOLs arising in tax years beginning in 2018, 2019 and 2020; and
- Modifies the AMT credits to be 100% refundable for tax years beginning after December 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.
Below takes a closer look at how these two provisions work together.
Interplay of the NOL Carryback and AMT
The Tax Cuts and Jobs Act (TCJA) repealed the corporate AMT for tax years beginning after December 31, 2017. Previously, corporations were subject to a 20% AMT. Any AMT paid was considered a future credit that could be carried forward indefinitely to offset future regular income tax, subject to limitations.
The new five-year NOL carryback rule may create some complexities for corporations that were subject to the AMT regime in these carryback years. 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). If no alternative tax NOLs are allowed as a carryback due to the repeal of the AMT, 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 likely would still be a refund. The AMT paid for that prior year would then become a refundable minimum credit currently under the new CARES Act rules.
Alternatively, would corporate taxpayers have a quasi-alternative tax NOL calculation that would be allowed under the new rules? If so, the 90% alternative tax NOL limitation for pre-TCJA years would also have to be included in the analysis. Either scenario seems to result in an overall refund, but the AMT calculation has the potential to shift it into different tax years.
The IRS provided much-needed clarification in its May 27, 2020, FAQs, addressing the forms, timeline and procedural details concerning NOL carrybacks and refundable minimum credits.
The FAQs set forth the following guidelines:
- No alternative tax NOL should be treated as arising in post-TCJA years due to the repeal of the AMT. 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 is required for any fillings prior to June 1, 2020, that did not follow the May 27 FAQs, unless the taxpayer is contacted by the IRS. Such filings may take longer to process if the filing was not consistent with the FAQ.
- 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. However, the corporation must elect to claim 100% of its refundable minimum tax credits under Sec. 53(e)(5) in order to claim both. If the corporation is eligible for tax credits under any other section, it must separately file Form 1120X, and not Form 1139.
- The FAQs provide additional procedural details and deadlines relating to forms and elections, and clarifies next steps for corporate taxpayers under various circumstances.
>> Read “Questions and Answers About NOL Carrybacks of C Corporations to Taxable Years in Which the Alternative Minimum Tax Applies”
Timing is Key
The intent of the CARES Act is to help accelerate cash into the hands of businesses. However, while the Act in general is 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. Entities may need to file carrybacks first to finalize any AMT credits available for a refund. Corporations looking for quick refunds will need to carefully consider timing and filing of the appropriate forms for the best chance of success.
Contact Andreana Shengelya at firstname.lastname@example.org or a member of your service team to discuss this topic further.
This item was originally published in the August 2020 issue of The Tax Adviser, an AICPA publication. Read Andreana’s full technical article in The Tax Adviser now.
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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.