The CARES Act provides relief to Corporations subjected to Alternative Minimum Tax Credit by accelerating the ability to use the credits to offset current taxable income.
It is important to first understand where the law stood prior to March 27, 2020.
Pre-Tax Cuts and Jobs Act (TCJA), Before 01/01/2018:
Corporations were subject to alternative minimum tax (AMT) when calculated AMT exceeded the regular tax. AMT was calculated by starting with regular taxable income, then making adjustments for certain deductions disallowed for AMT purposes to arrive at alternative minimum taxable income (AMTI). The most common add back was accelerated depreciation over the slower ADS depreciation allowed for the AMT calculation. When corporations paid AMT, a minimum tax credit (AMT credit) was generated, which was the excess amount of Alternative Minimum Tax calculated over the tax calculated in the regular manner. This AMT credit was carried forward to offset regular tax in the future years when the regular tax exceeded the tentative alternative minimum tax (TAMTI).
Under pre-TCJA, AMT credit carryforwards were non-refundable and could offset at a maximum, the corporation’s regular tax in excess of TAMTI.
In 2016, a corporation’s regular tax is $10,000 and its AMT is $15,000. The corporation is subject to AMT and will pay the total tax liability of $15,000. The corporation will have an AMT credit of $5,000 (the excess of AMT over regular tax), which is carried forward to 2017. In 2017, if the corporation’s regular tax is $10,000 but AMT is only $8,000, the corporation would be able to utilize the credit carryforward in the amount of $2,000 (the excess of regular tax over AMT) to offset 2017 tax, and the remaining credit of $3,000 would be carried forward to 2018.
TCJA, Beginning 01/01/2018:
Under TCJA, corporate AMT was eliminated. This means corporations were no longer subject to AMT beginning for the taxable year 01/01/2018. In addition, AMT credit carryforwards from 2017 and prior years are refundable, and 50% of the credit can be claimed for each tax year 2018-2020 and 100% for 2021.
Continued with the example above, the corporation has pre-2018 AMT credit carryforwards of $3,000. In 2018, the corporation can claim $1,500 (50% of $3,000) of the AMT credit to offset regular tax, and any excess credit remaining will be refunded. In 2019, 2020, and 2021, the corporation can use the remaining AMT credit carryforwards of $1,500 ($3,000 less $1,500 used in 2018) as follows:
2019: $750 (50% of $1,500)
2020: $375 (50% of $750, remaining credit after 2019)
2021: $375 (100% of remaining credit)
CARES Act: Signed into Law 03/27/2020
Under the CARES Act, Section 2305, the treatment of the credit for the prior year minimum tax liability for corporations is amended. The amendment to Section 53(e) allows corporations to either make an election to claim the entire refundable AMT credit carryforward in 2018 or treat the remaining credit carryforward as 100% refundable in 2019. In the event the corporation makes an election to claim the entire credit in 2018, the application for a tentative refund under Section 6411 must be filed no later than 12/31/2020.
Continuing with the example above, the corporation has a pre-2018 AMT credit carryforward of $3,000. In 2018, the corporation claimed $1,500 of the $3,000 AMT credit carryforward. The remaining credit of $1,500 is carried forward to 2019 and beyond. Under the CARES Act, the corporation can elect to claim the entire pre-2018 AMT credit carryforward of $3,000 on its 2018 tax return by filing an application for tentative refund (Form 1139) under Section 6411 on or before 12/31/2020, OR the corporation can treat the remaining $1,500 AMT credit as 100% refundable in 2019.
Please contact us with any questions regarding the CARES Act or this particular provision.