On March 25, 2020, Congress passed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) as it relates to businesses, which allows taxpayers to take advantage of various additional cash flow opportunities to keep their businesses operational. The CARES Act modified, among other things, the treatment of net operating losses ("NOLs") generated in 2018 through 2020. Specifically, the CARES Act allows taxpayers to carry back NOLs generated in 2018, 2019 and 2020 to the five preceding tax years and recover tax paid in those years. This new carryback allowance replaces the rule added to the tax code by the Tax Cuts and Jobs Act in 2017 (“TCJA”), which completely disallowed the carryback of NOL's to prior tax years. In addition, the CARES Act defers the corporate NOL usage limitation of 80% of taxable income (established by TCJA) until years beginning after 2020. These new rules are meant to allow taxpayers to apply current NOLs to prior, income-generating years, in order to generate a tax refund, and additional cash flow, in the current year.
In action, this could look like the following for a domestic corporation. Company C, a U.S. Corporation, generated $100,000 of taxable income in its 2013 tax return. Company C generated an NOL in 2018 of $150,000. Company C could choose to carry $100,000 of its $150,000 NOL generated in 2018 to tax year 2013. Barring other limitations, this would bring the taxable income of Company C to $0, and would yield a refund in the amount of tax paid in 2013 in the current year. The infusion of cash flow could allow Company C to continue operations and carry on business until the end of the COVID-19 pandemic.
It is not that simple, however, for multinational corporations. Specifically, those corporations that have global intangible low-taxed income ("GILTI") face a major decision when it comes to carrying back NOLs to prior tax years. GILTI, for those that may not be familiar, was added to the Internal Revenue Code in 2017 and is an additional category of income, derived from various types of intangible assets housed in lower-tax jurisdictions. Taxpayers who are required to recognize GILTI are entitled to a deduction, subject to various limitations, of up to 50% of GILTI on their U.S. tax returns. However, if a corporate taxpayer decides to carry back its NOLs, the taxpayer runs the risk of losing all or a portion of the 50% deduction in 2018 and 2019. Without careful planning, corporate taxpayers risk underutilizing the preferential tax rate for GILTI in order to gain a potentially nominal benefit. They may also be foregoing the ability to utilize other tax attributes, such as foreign tax credits, and failing to consider the interplay between GILTI and other tax attributes, such as FDII.
The risks and benefits vary from business to business and are largely dependent upon the circumstances of each individual taxpayer. While purely domestic corporations likely will see very little downside to the application of NOLs to prior-year income, any company doing business abroad should think for a moment before racing to amend it prior-year tax returns. Ultimately, only the corporation will be able to decide if the choice to amend and infuse its business with cash now, is worth the potential increase in tax down the road. Whether you operate internationally or domestically, if you wish to discuss the risks and rewards of amending a prior-year tax return, our tax professionals would love to hear from you!
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.