The IRS has clarified how corporations carry back net operating losses to years subject to the alternative minimum tax rules, which had been a source of confusion for taxpayers trying to manage cash flow, but the new guidance raises other issues.
In a list of questions and answers posted to its website May 27, the IRS addressed the interaction between NOL carrybacks under the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) and the AMT rules for C corporations effective for pre-2018 years.
“The recently posted Q&A concerning NOL carrybacks provides some helpful guidance for taxpayers,” but raises more concerns, according to Kevin M. Jacobs of Alvarez & Marsal Taxand LLC.
For example, according to Q&A No. 4, “the ability to claim a minimum tax credit on a Form 1139, ‘Corporation Application for Tentative Refund’ . . . is contrary to the existing Form 1139 instructions and is exceptionally helpful due to the expedited processing associated with the Form 1139 compared to the processing of an amended return,” said Jacobs, a former senior technician reviewer with the IRS Office of Associate Chief Counsel (Corporate).
But Jacobs pointed out that because the guidance isn’t included in the Internal Revenue Bulletin, taxpayers can’t rely on it as legal authority, as the IRS has noted on several of its websites, albeit not on this posting.
“Further, the IRS can change its guidance at any time as part of the Q&As, as we have seen with respect to the employee retention credit,” Jacobs said.
“As a result, taxpayers are left with the quandary of following the code and calculating an [AMT NOL], which according to [Q&A No. 1] may delay the processing of their refund claim, or following [that guidance] and taking a position that appears to be contrary to the code,” Jacobs told Tax Notes.
The CARES Act modified section 172 to address liquidity issues arising from the COVID-19 pandemic by, among other things, allowing companies to carry back losses arising in tax years from 2018 to 2020 for up to five years before the year of the loss.
With the Tax Cuts and Jobs Act’s repeal of the corporate AMT, Congress allowed companies to offset their regular tax liability by the amount of the AMT credit. Under section 53(e), credits remaining at the end of tax years from 2018 to 2020 are refundable in an amount equal to 50 percent of the excess of the AMT 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 refunds on the remaining credits in 2018 or 2019.
Because of the TCJA’s repeal of the corporate AMT— which means there is no tentative minimum tax beginning in 2018 — questions arose, including how to determine and carry back AMT NOLs in post-2017 to 2017 or earlier.
The IRS clarified in Q&A No. 1 that for a C corporation that is carrying back all or a portion of a post-2017 NOL to a pre-2018 tax year in which AMT rules apply, the AMT NOL in the post-2017 year is treated as zero for amended returns or tentative refund forms filed on or after June 1.
“This is helpful for taxpayers in that they will not need to apply the alternative minimum tax adjustment rules in a year in which they will not have an alternative minimum tax liability,” Jacobs said. That, coupled with taxpayers' ability to claim resulting minimum tax credits on a Form 1139, is favorable, but this treatment is contrary to the code, according to Jacobs.
Jacobs pointed to section 56(d)(2)(A), which survived the TCJA, saying that under that provision, “taxpayers should have to calculate an AMT NOL, notwithstanding the fact that no alternative minimum tax would be imposed in the year that generated the net operating loss.”
The IRS also addressed other questions, such as how and when corporations should make the section 53(e)(5) election to claim 100 percent of refundable credits in 2018 under the CARES Act.