The Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748), which is being dubbed as the most ambitious economic stimulus legislation in U.S. history, was signed into law on March 27, 2020, and is intended and designed to get cash in the hands of small businesses to assist with day-to-day operations, keep staff on payroll, or re-hire workers who have already been laid off, and to provide economic relief to those companies directly impacted by the COVID-19 crisis. The CARES Act includes among many other items, an Economic Stimulus Payment, the Paycheck Protection Program, and modifications to the Internal Revenue Code.
Discussed below are changes to tax provisions that temporarily reverse certain changes made by the Tax Cuts and Jobs Act (TCJA) which may impact Multinational Companies:
Net Operating Losses (NOLs). The CARES Act:
- Allows a corporation’s net operating losses (NOLs) from 2018, 2019, and 2020 to be carried back for five years;
- Temporarily suspends the 80% taxable income limitation on the use of an NOL to offset taxable income, therefore allowing taxable income to be fully reduced by an NOL in the tax years listed above;
- Allows corporate taxpayers that may be able to carry back losses a 120-day period to make certain important elections, including the election to forego the carryback.
- Specifically prevents the use of NOL carrybacks to offset income includible under section 965 (Transition Tax/Repatriation Tax, Toll Tax) during 2017 and 2018.
- Specifically prevents a REIT to carry back losses.
While a carryback of an NOL may initially seem to be beneficial, please consult with your tax advisors before making this decision. An NOL carryback (or carryforward) may affect a company’s (i) allowable Section 250 deduction (which provides for the 37.5% deduction for FDII and 50% deduction for GILTI); (ii) allowable foreign tax credits; (iii) base erosion anti-abuse tax (BEAT); and (iv) in some cases, the Section 965 transition tax liability. It may be just as appropriate to carry forward NOLs if you decide not to carry back.
It is also important to consider the tax rate differential between pre-TCJA and post-TCJA tax years with regards to NOLs and Foreign Tax Credits. The corporate tax rate prior to the Tax Cuts and Jobs Act was 35% as opposed to the reduced 21% corporate rate post-TCJA.
Excess Business Losses. The CARES Act:
- Retroactively suspends the excess business loss provision of section 461(l)(1) (which disallows business losses in excess of $250,000 for a single taxpayer and $500,000 for a married couple filing jointly) for 2018 through 2020.
Section 163(j) Interest Expense Limitation. The CARES Act:
- Retroactively allows taxpayers to increase the adjusted taxable income (ATI) limitation on business interest expense from 30% to 50% for the 2019 and 2020 tax years.
- Allows taxpayers to elect to apply their 2019 ATI on their 2020 tax returns next year in calculating the interest expense limitation.
- Does not allow partnerships to use the 50% limitation in 2019. Partnerships must use the 30% ATI limitation in 2019 but can use the 50% ATI limitation in 2020.
Consult with your WB tax advisor to determine if utilizing the increased 50% limitation is beneficial and to ensure there are no adverse effects. There are also additional changes at the partner level related to excess business interest.
Section 965 Transition Tax Installments. The Cares Act:
- Does Not prevent future installment obligations of the Transition Tax from averting a refund of overpayments or increase estimated taxes. Therefore, if you are currently under a Transition Tax 8-year installment agreement, you will not be able to claim any refunds of taxes, as refunds will continue to be applied against future installments.
Section 958(b)(4) Downward Attribution. The CARES Act:
- Does Not Repeal Downward Attribution. Similar to what happened in the Tax Cuts and Jobs Act, the Senate bill included for correction of the downward attribution rules, however, the CARES Act does not contain the provision in the March 16 version that would have restored section 958(b)(4). Before its removal as part of the 2017 Tax Cuts and Jobs Act, section 958(b)(4) prevented a United States person from being treated as owning the stock owned by its foreign owner.
Please contact Brandi Samuel or your Windham Brannon tax advisor with any additional questions.
The CARES Act is intended to assist American individuals and businesses in coping with the Coronavirus pandemic. Due to the nature of the crisis, the law was written quickly, had multiple changes in drafts, and is expected to have numerous clarifications in the future. As such, WB will provide, on a reasonable efforts basis, consultative services to clients relative to various loan programs and other benefits available under the recently enacted CARES Act.