Corporations with net operating losses in 2018, 2019, or 2020 could be eligible for significant tax refunds under the new rules of the CARES Act.

Previously, the Tax Cuts and Jobs Act, passed in December 2017, limited the ability of corporations to use their net operating losses (NOLs) in two ways, starting with tax year 2018 losses:

  1. It precluded them from carrying the current year’s losses back to prior years.
  2. It limited the amount of losses that could be used in any one future year to only 80% of the amount of the loss. The Act did allow losses to be carried forward indefinitely.

For taxpayers with losses originating prior to 2018, the rules remained the same. Losses could be carried back two years and carried forward 20 years.

CARES Act Expands Corporations’ Ability to Use NOLs and Obtain Additional Refunds

To bring much-needed relief from the damage of COVID-19, Congress passed The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was signed in to law on March 27, 2020. Lawmakers assumed that taxpayers who are dealing with lower revenues, business interruptions, and excess expenses because of Covid-19 might find themselves with overall losses in 2020. As such, the following relief is now available:

1. The CARES Act allows NOLs from 2020, as well as those from 2018 and 2019, to be carried back five years from their origination. This will create tax refunds for many corporate taxpayers.

2. The IRS is expediting these refunds for taxpayers by allowing the refund claims to be processed via fax instead of only by mail, and it does not require taxpayers to amend the entire prior year returns to obtain the refunds.

How does this affect companies that paid the Repatriation Tax in 2017?

Back in 2017, the TCJA had created a one-time Repatriation Tax (also known as the “Transition Tax” or IRC §965 tax) that applied to many US corporations that owned interests in foreign corporations. These corporations were required to calculate their repatriation income, subject to the Repatriation Tax, on their 2017 tax returns (for calendar year filers) or 2018 returns (for certain fiscal year filers).

Now, under the CARES Act, NOLs may be carried back five years, to 2013, to offset this repatriation income. However, taxpayers may elect NOT to apply their NOLs to particular tax years and may exclude the tax year in which they were subject to the Repatriation Tax.

This brings up an interesting question. Which tax years are most advantageous to apply NOLs? Remember that for tax periods through December 31, 2017, the corporate tax rate was typically 35% but could be as high as 39%. For tax periods from January 1, 2018, onward, the corporate tax rate was reduced to 21%. Further, remember that the Repatriation Tax allowed taxpayers a special tax rate of 15.5% on earnings attributable to non-cash equivalents and 8% on earnings attributable to cash equivalents. To maximize refunds, taxpayers may wish not to apply their NOLs to the repatriation tax year. They will most likely want to apply their NOLs to tax years 2017 and prior because of these rate differences.

Like many COVID-19 relief measures, provisions are time-sensitive. Taxpayers interested in using their current-year or prior-year losses should move quickly to:

• Ensure that the elections they make on their tax forms are consistent with the treatment they are looking to achieve, and

• Lock in the ability to file the application for a tentative refund rather than having to amend an entire tax return.

The Wolf Group has been providing international tax services since 1983. We assist corporations in understanding the applicability of these COVID-19-related provisions, determining the appropriate NOL carryback strategy, filing NOL refund claims, and amending returns for Repatriation Tax matters. Learn more about our services here.