On May 27, 2020, the U.S. Internal Revenue Service (the IRS) published guidance (the Guidance) regarding the interaction of the five-year net operating loss (NOL) carryback rules under the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) and the corporate alternative minimum tax (the AMT).
Corporate Alternative Minimum Tax
For taxable years beginning after 1986 but before January 1, 2018, corporate taxpayers were subject to the AMT regime. Under this regime, a corporate taxpayer was subject to the AMT to the extent that its “tentative minimum tax” exceeded its regular tax liability. The “tentative minimum tax” was equal to the product of (i) 20% and (ii) the excess, if any, of the taxpayer's alternative minimum taxable income over a $40,000 exemption (which was phased-out for certain corporate taxpayers), less the alternative minimum tax foreign tax credit available to the taxpayer for the applicable taxable year. In determining its alternative minimum taxable income, a taxpayer was required to use the alternative tax net operating loss deduction (ATNOL) in lieu of the normal net operating loss deduction allowed under section 172 of the Internal Revenue Code of 1986, as amended (the Code). The ATNOL was generally equal to the taxpayer's normal NOL under section 172, but adjusted on account of tax preference items described in section 57 and adjustments to taxable income set forth in sections 56 and 58. Additionally, the amount of the ATNOL deduction allowable for a taxable year was limited to 90% of the taxpayer's alternative minimum taxable income (computed without regard to the ATNOL deduction).
The corporate AMT was repealed under the Tax Cuts and Jobs Act of 2017 (the TCJA).1 In connection with the repeal of the corporate AMT, section 53(e)(2) was amended to permit corporate taxpayers to receive a refundable tax credit equal to the excess of 50% (100% in the taxpayer's 2021 taxable year) of any remaining minimum tax credits (MTCs) over the amount of the MTC allowable for the taxable year against the taxpayer's regular tax liability. The CARES Act accelerated the time period in which taxpayers could recover remaining MTCs by providing that: (i) 50% of a taxpayer's remaining MTCs (after utilizing any MTCs against the taxpayer's regular tax liability during the 2018 taxable year) could be recovered by the taxpayer in 2018 as a refundable tax credit and (ii) 100% of any remaining MTCs (after utilizing any MTCs against the taxpayer's regular tax liability during the 2019 taxable year) could be recovered by the taxpayer in 2019 as a refundable tax credit. Additionally, the CARES Act permitted a corporate taxpayer to elect to recover all remaining MTCs as a refundable tax credit for its first taxable year beginning in 2018 in lieu of receiving the refundable tax credit in 2018 and 2019.
NOL Carryback Rules
The CARES Act permits corporations to carry back NOLs generated in a taxable year beginning after December 31, 2017 and before January 1, 2021 to the five taxable years preceding the taxable year in which the NOL was generated.2
Interaction of NOL Carryback and AMT Rules
Because corporations can now carry back NOLs to years prior to the effective date of the TCJA in which the corporate AMT was still applicable, a corporation carrying back an NOL to a pre-TCJA year must consider the impact of the NOL carryback on its AMT liability in such year.
The interaction of the NOL carryback and AMT rules has raised multiple questions, including questions as to (i) the amount of a ATNOL, if any, that a corporation should carry back from a post-TCJA year, (ii) the procedure for recovering remaining MTCs generated or released as a result of the NOL carryback, and (iii) the procedure for making the election under section 53(e)(5) to recover 100% of the unutilized MTCs in the taxpayer's first taxable year beginning in 2018. As discussed in more detail below, the Guidance addresses each of these questions.
Amount of ATNOL Arising in Post-TCJA Year Is Zero
Following the enactment of the CARES Act, there was uncertainty regarding the amount of the ATNOL, if any, that could be carried back from a post-TCJA year (in which the corporate AMT was not applicable) to a pre-TCJA year. Some believed that the retention of section 56(d)(2)(A) following the enactment of the TCJA supported a conclusion that a corporate taxpayer looking to carryback NOLs from a post-TCJA year would need to compute its ATNOL and carryback the ATNOL to the pre-TCJA year.
The Guidance states that with respect to Forms 1120X (Amended U.S. Corporation Income Tax Return) and Forms 1139 (Corporation Application for Tentative Refund), in each case, filed on or after June 1, 2020, the amount of the ATNOL arising in a post-TCJA year should be reflected as $0.3 The Guidance warns that the processing of a corporate taxpayer's refund claim may be delayed if the taxpayer uses a different method to determine the amount of its ATNOL. The Guidance provides that a corporate taxpayer does not need to take any action (including refiling) with respect to a Form 1120X or Form 1139 filed before June 1, 2020, unless the taxpayer is contacted by the IRS.
Procedure for Claiming MTCs Arising in Connection with NOL Carrybacks
Where an NOL is carried back from a post-TCJA year to a pre-TCJA year, such carryback may either (a) generate additional MTCs in the year to which the NOL was carried back (which is more likely to be the case as a result of treating the ATNOL arising in the post-TCJA year as being $0) or (b) result in the release of MTCs that were previously utilized in the taxable year to which the NOL was carried back. Released MTCs can then be carried forward. The Guidance provides additional clarification as to how taxpayers can claim refunds arising with respect to such MTCs.
The Guidance provides that a taxpayer that (i) cannot use the MTCs from a pre-TCJA year generated or released by the NOL carryback in any taxable year prior to 2018, and (ii) makes the election under section 53(e)(5) to recover 100% of its MTCs in its first taxable year beginning in 2018, may claim both the NOL carryback and MTC refund for its first taxable year beginning in 2018 on a Form 1139.4
The Guidance also addresses a fact pattern where a taxpayer has MTCs generated or released as a result of an NOL carryback and is able to use such MTCs in a subsequent taxable year that is part of the carryback period to offset its regular tax liability (as opposed to resulting in a refundable MTC). In such a situation, the taxpayer may claim a refund for any decrease in its regular tax liability arising from the utilization of MTCs by filing a Form 1139.5 However, a Form 1139 cannot be used to claim the refundable portion of the MTC unless the taxpayer makes a timely election under section 53(e)(5) to claim 100% of such MTCs in its first taxable year beginning in 2018. Taxpayers that are seeking to recover the refundable portion of the MTC for any reason other than an election under section 53(e)(5) must separately file a Form 1120X to claim any such refund.
The Guidance is helpful to taxpayers because it permits taxpayers to receive a refund arising from an NOL carryback, a refundable MTC, or the utilization of MTCs, in each case, by filing a single Form 1139 with the IRS, which must be processed by the IRS within 90 days of the receipt thereof.
Procedure for Making Section 53(e)(5) Election
The Guidance provides additional clarification regarding the procedure for making the election under section 53(e)(5) to claim 100% of a corporate taxpayer's remaining MTCs in its first taxable year beginning in 2018.
In particular, the Guidance provides that such election may be made by filing a Form 1120X or Form 1139 with the IRS and writing "Electing to Take 100% Refundable Credit Amount in 2018 – per CARES Act Section 2305(b)" at the top of such form.
Furthermore, the Guidance provides that an election under section 53(e)(5) that is made on a Form 1139 must be filed on or before December 30, 2020.6 Additionally, an election under section 53(e)(5) that is made on a Form 1120X must be filed by the later of (i) the date that is three years from the date that the tax return for the corporate taxpayer's first taxable year beginning in 2018 was filed and (ii) two years from the date that the corporate taxpayer paid its tax for its first taxable year beginning in 2018 (i.e., the last day of the period described under section 6511(a) with respect to the taxpayer's first taxable year beginning in 2018).
1 Pub. L. No. 115-97 (2017). Section 12001 of the TCJA amended section 55(a) by limiting the application of the AMT to non-corporate taxpayers, thereby repealing the corporate AMT.
2 For a detailed discussion of the impact of NOL carrybacks to pre-TCJA years (including section 965 years) and post-TCJA years, please refer to our client note, Claiming Refunds for Corporate Net Operating Loss Carrybacks Under the CARES Act.
3 Because the ATNOL arising in a post-TJCA year is treated as $0, the corporation will generally be subject to the AMT in the pre-TJCA year to which the loss is carried back. For example, if a taxpayer had regular and alternative minimum taxable income of $100 in a pre-TJCA year (prior to taking into account the impact of an NOL carryback) and carries a $100 NOL back from a post-TJCA year, the taxpayer's regular taxable income for the pre-TCJA year would be $0, but the AMT liability would be $20 (disregarding the $40,000 exemption and the impact of any alternative minimum tax foreign tax credits). However, as discussed above, the $20 of AMT liability would generate MTCs that are potentially refundable to the taxpayer in 2018 and 2019.
4 The IRS Guidance instructs taxpayers to follow questions 11 and 12 set forth in the temporary procedures to fax certain Forms 1139 and 1045 due to COVID-19.
5 Taxpayers should note the change in the MTC in the applicable column on line 21 for the year in which the MTC is utilized.
6 However, if the Form 1139 includes a claim for refundable MTC and an NOL carryback that arose in a taxable year that began during 2018 and ended on or before June 30, 2019, the Form 1139 must be filed by the earlier of (i) the date that is 18 months after the close of the taxable year in which the NOL arose (the extended due date provided under Notice 2020-26) and (ii) December 30, 2020.Special thanks to Alex Liebmann for his contribution to this publication.
Originally published 4 June, 2020
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