For corporations looking to obtain tax refunds as a result of 2020 Tax Code changes, the IRS has published questions and answers explaining how refund claims should address alternative minimum tax (AMT) rules. This IRS guidance will assist companies filing refund claims due to net operating loss (NOL) carrybacks. Corporations that already have filed a refund claim generally will not be required to re-file the claim.
Corporations may carry NOLs back to earlier years and obtain refunds of previously paid Federal income tax under provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted March 27, 2020. The carryback period is five years, and NOLs arising in years beginning after Dec. 31, 2017 and before Jan. 1, 2021 are eligible for carryback. For further coverage of the NOL carryback rules enacted in 2020, see our prior Alerts: CARES Act delivers five-year NOL carryback to aid corporations, Carrying back consolidated net operating losses under the CARES Act, and IRS issues long-awaited guidance on NOL carryback procedures, and Updates to fax submission procedures for Forms 1139 and 1045.
In December 2017, Congress repealed the corporate AMT for tax years beginning after Dec. 31, 2017 (Post-2017 Years). In doing so, Congress eliminated corporate tax liability for AMT on a going forward basis, repealed some but not all AMT computation rules, and permitted refund claims based on AMT credit carryforwards from years beginning prior to Jan. 1, 2018 (Pre-2018 Years).
New NOL carryback IRS website guidance
One question that arose in 2020 as a rules of the newly-authorized NOL carryback computations was: Should corporations compute alternative tax net operating losses (AMT NOLs) for Post-2017 Years, doing so for the purpose of carrying those AMT NOLs back to Pre-2018 Years in connection with an NOL carryback claim under the new CARES Act provisions? RSM had communicated with Treasury and the IRS requesting guidance answering this question. The IRS’ newly-published website guidance provides an answer – AMT NOL calculations should not be performed for Pre-2018 Years. This Alert summarizes the newly-released question and answer guidance.
Q1: When determining a corporation’s alternative minimum taxable income (AMTI) in Pre 2018 Years, how is the AMT NOL for Post 2017 Years computed?
A1: The corporation should treat its AMT NOL arising in Post 2017 years as zero. The IRS noted that taxpayers filing Forms 1120X or 1139 with an AMT NOL computed using a different method may experience a delay in the processing of the requested refund.
Q2: If a corporation has already filed Form 1120X or Form 1139 using a different method to compute its AMT NOL, what remedial actions should the taxpayer take, if any?
A2: The corporation does not need to take any action, or refile a Form 1120X or Form 1139 that was filed before June 1, 2020, unless contacted by the IRS.
Q3: A corporation carrying back a Post-2017 Year NOL to a Pre-2018 year generates an AMT liability or releases a previously utilized minimum tax credit (AMT Credit) and the corporation is not able to utilize the newly generated or released AMT Credit in a taxable year beginning prior to 2018. Furthermore, the corporation elects to recover 100% of its AMT Credits in its first taxable year beginning in 2018 (the 2018 Year) under section 53(e)(5). Can the corporation request a refund for both the AMT Credits and the NOL carryback on the same Form 1139?
A3: Yes. The IRS instructs corporations to follow its previously issued temporary procedures for making these requests on a single Form 1139.
For more information on these temporary procedures, refer to our previous Tax Alert: Updates to fax submission procedures for Forms 1139 and 1045.
Q4: Assume the same set of facts as the previous question, however the newly generated or released AMT Credits can be utilized in a Pre-2018 Year in the carryback period. May the taxpayer request a refund for the reduction of the Pre-2018 Year tax liability after utilizing the AMT Credits and the NOL carryback on the same Form 1139?
A4: Yes. In general, prior to the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA), AMT Credits could only be utilized to the extent a corporation’s regular income tax liability exceeded its tentative minimum tax liability in Pre-2018 Years. To the extent the newly created or released AMT Credits are able to be utilized in the Pre-2018 Years in the carryback period, such credits should be reflected on line 21 ‘Other credits’ of Form 1139 in the appropriate column for the taxable year in which the credit can be utilized.
The IRS also explains that Form 1139 is not to be used to request a refund for the refundable portion of AMT Credits unless the taxpayer has elected under section 53(e)(5) to recover 100% of its AMT Credits for the 2018 Year. If carrying back an corporation’s NOL arising in a Post-2017 Year to a Pre-2018 Year increases the total AMT Credits available in the 2018 Year, and the taxpayer does not make the election under section 53(e)(5), no increase to the 50% refundable portion of the AMT Credits should be claimed on Form 1139. Instead, the taxpayer must file Form 1120X to claim any additional refundable AMT Credits for the 2018 Year.
Q5: How is the election under section 53(e)(5) to recover 100% of AMT Credits in the 2018 Year made?
A5: The election under section 53(e)(5) is made by including “Electing to Take 100% Refundable Credit Amount in 2018 – per CARES Act Section 2305(b)” at the top of the Form 1139 or Form 1120X.
For more information on these Form 1139 filings, refer to our previous Tax Alert: Updates to fax submission procedures for Forms 1139 and 1045.
Q6: What is the due date for making the section 53(e)(5) election?
A6: The election must be filed no later than Dec. 31, 2020 on Form 1139. Elections made with Forms 1139 claiming refundable AMT Credits and carrybacks of NOLs that arose in taxable years that began after Dec. 31, 2017 and ended on or before June 30, 2019 are due on the earlier of (i) Dec. 31, 2020 or (ii) the extended due date for Form 1139 under Notice 2020-26. In Notice 2020-26, The IRS granted a six-month extension of time to file Forms 1139 to taxpayers for NOLs that arose in tax years beginning after Dec. 31, 2017 and ended on or before June 30, 2019.
For more information regarding Notice 2020-26, refer to our previous Tax Alert: IRS issues long-awaited guidance on NOL carryback procedures.
Section 53(e)(5) elections made with Forms 1120X must be filed in accordance with the period under section 6511(a) for the taxpayers 2018 Year. In general, section 6511(a) requires refund claims to be made by the later of (i) three years from the filing of the tax return or (ii) two years from the time the tax was paid.
The IRS has published a new set of questions and answers on its website that address NOL carryback tax refund claim calculations and procedures. Resolving an open question, the IRS has endorsed a straightforward approach for addressing AMT rules in connection with NOL carryback claims. AMT NOLs should be treated as zero for Post-2017 years. Corporations that already have filed a refund claim generally will not be required to re-file the claim even if the claim did not follow the approach the IRS has now specified.
Given the complexities of corporate tax rules and refund claim filing procedures, corporations should consult with their tax advisors regarding NOL carryback claims and computations.