Some corporations are having a hard time accelerating cash flow under the recently enacted coronavirus relief legislation because the new law doesn’t address how to carry back net operating losses to pre-2018 alternative minimum tax years.
Companies trying to get cash quickly under the new five-year NOL carryback rules are “running into some complications” because of the interaction of that provision with the AMT NOL rules, Christine Turgeon of PwC said on an April 7 webcast sponsored by her firm.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) modified section 172 to address liquidity issues arising from the coronavirus pandemic by temporarily repealing the 80 percent NOL limitation and allowing deductions for loss carryovers and carrybacks to fully offset taxable income for tax years beginning before January 1, 2021.
The new law also allows taxpayers to carry back losses arising in tax years from 2018 through 2020 for up to five years before the year of the loss.
Because the Tax Cuts and Jobs Act repealed the corporate AMT— which means there is no tentative minimum tax beginning in 2018 — some people might think taxpayers wouldn’t have an AMT operating loss, Turgeon said. But taxpayers that carry back losses under the CARES Act to 2017 or earlier could have a regular tax NOL, and if there aren’t loss carrybacks for AMT purposes, that could create minimum tax liability and complicate modeling efforts, she said.
Taxpayers in that situation would receive refunds for the additional AMT created, but the gap in the relief legislation creates significant complexities, Turgeon said.
That’s partly because taxpayers that generate AMT credits in the years that losses are carried back must file forms “in subsequent intervening years to be able to redeem those credits,” Turgeon explained. And if they don’t do it right, their carryback form could be “kicked out” and have to be refiled, further delaying the processing of refunds, she said.
It would be better to assume that the AMT NOL equals the regular tax NOL in 2018 through 2020, according to Turgeon. She explained that taxpayers would still have to compute alternative minimum taxable income and take the AMT deduction in the years in which the minimum tax rules apply.
Legislative Glitch?
It appears that the AMT quirk wasn’t intentional but rather a casualty of the rapid legislative process, according to Turgeon. And it probably wasn’t a significant concern in Congress that taxpayers could have a minimum tax due because the AMT credits would be returned to taxpayers, she said.
With the repeal of the corporate AMT, Congress allowed companies to offset their regular tax liability by the AMT credit. Under section 53(e), credits remaining at the end of tax years 2018 to 2020 are refundable in an amount equal to 50 percent of the excess of the minimum tax credits over the regular tax liability for the tax year. Remaining amounts of AMT credits are fully refundable for tax years beginning in 2021.
The CARES Act accelerated the recovery of the AMT credits by allowing companies to claim a refund on the remaining credits in 2018 or 2019.
“We’re waiting to maybe see if the government is going to address [the AMT] in subsequent guidance or maybe legislative history,” Turgeon said.
Disaster Loss Guidance
Guidance is also needed outside the CARES Act, such as for determining what pandemic-related losses would qualify under the federal disaster recovery rules, according to George Manousos of PwC.
Casualty loss deductions are generally claimed in the year of the loss. However, losses in a federally declared disaster area may be deducted on the taxpayer’s prior-year return under section 165(i). The statute provides taxpayers that suffered a loss — and need cash — the opportunity to monetize those losses quicker and reinvest in the business by reducing prior-year taxes.
“The big question is, what is a loss attributable to a disaster?” Manousos said.
Manousos pointed out that the provision is typically used by capital-intensive companies for damages or destruction from a hurricane, tornado, or other natural disaster. Those losses — for example, from the destruction of a building — are more tangible than what companies are experiencing today, Manousos said.
Many companies have had to shut down their businesses because of the pandemic, but it’s unclear whether their daily losses from operations are eligible for deduction in the prior year under section 165(i), Manousos said. “And then, how do you value what that loss is?” he asked.
Manousos also pointed to retailers and other businesses that rent their facilities and are continuing to pay rent, utilities, and payroll, and those that have spoiled or damaged inventory because of the pandemic. Those situations are more tangible and quantifiable, but the question remains whether the expenses incurred are disaster losses, Manousos said, because they don’t relate to property damage, which is the traditional basis eligible for the loss deduction election.
Similarly, utilities mandated by their regulators to “provide electricity to customers that they know aren’t going to have the wherewithal to pay” wonder whether those costs are losses attributable to the coronavirus, Manousos said.
Manousos pointed out that some companies may prefer to record the loss in 2020, rather than make the loss deduction election, because that’s the year they expect to generate an NOL eligible for carryback.
“Like anything else, it’s a big modeling exercise,” Manousos said, and people are evaluating whether there’s precedent to apply section 165(i) to the current circumstances. “We’re hoping to get further guidance from the government . . . in the near term,” he added.
In an April 3 letter, the American Bar Association Section of Taxation requested that the IRS clarify what losses arising from or attributable to the pandemic will be considered “casualty losses.” The ABA suggested that the guidance could be added to the procedure for making the disaster loss deduction election (Rev. Proc. 2016-53, 2016-44 IRB 530).