The CARES Act and Net Operating Losses: International Tax Considerations
On April 9, 2020, the Internal Revenue Service (IRS) issued Revenue Procedure 2020-24. The purpose of the Revenue Procedure is to provide guidance related to Section 172(b)(1)(D) of the Internal Revenue Code, which was created as a part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Specifically, Section 172(b)(1)(D) allows a carryback of any net operating loss (NOL) arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021, to each of the five years preceding the year in which the NOL was created. Taxpayers will carryback the relevant NOL to the earliest taxable year in the carryback period, carrying forward any unused amounts to each succeeding tax year.
This carryback is important from an international tax perspective because an NOL generated in 2018, 2019, or 2020 could have the possibility of being carried back to a year in which there was a Section 965 inclusion. If you recall, the Tax Cuts and Jobs Act of 2017 instituted a single time “toll” tax to bring any earnings and profits held by foreign corporations (generally controlled foreign corporations or foreign corporations with a U.S. C corporation owner) back to the U.S. tax jurisdiction. That toll tax had a calculated deduction in order to bring the effective tax rate on the inclusion down to 8% on the non-cash portion of the inclusion and 15.5% on the cash portion of the inclusion. Learn more about Section 965 in “New Guidance for Complying with Code Section 965 – Deemed Repatriation.”
The new Revenue Procedure does contemplate the Section 965 implications. Essentially, taxpayers may want to avoid offsetting lower-taxed 965 income in order to potentially offset higher taxed income with the NOL deduction. The Revenue Procedure allows taxpayers this option by providing guidance around Section 172(b)(1)(D)(v)(I) which provides an election to exclude from the carryback period any taxable year in which the taxpayer had a Section 965(a) inclusion.
In order to make this election to exclude the Section 965 years from the carryback period (or to waive the carryback period for an NOL arising in a taxable year beginning in 2018 or 2019), an election must be filed by the due date, including extension, for the taxpayer’s Federal income tax return for the first taxable year ending after March 27, 2020. If the taxpayer does not waive the NOL carryback or elect to not include a year which had a Section 965 inclusion, the taxpayer will be deemed to have made a Section 965(n) election for any year in the carryback period that had a Section 965(a) inclusion. The Section 965(n) election allows a taxpayer to not take into account any Section 965(a) inclusions, reduced by Section 965(c) deductions, and associated Section 78 gross-ups in determining the taxpayer’s NOL deduction or taxable income for the year.
In addition to the impact on years with Section 965 inclusions, it is important that taxpayers consider other international tax attributes (in addition to all their other Federal tax attributes) when considering the impact of an NOL carryback on a taxable year. This includes the calculation under Section 951A of global intangible low taxed income (GILTI), the deduction calculation under Section 250 related to foreign derived intangible income (FDII) as well as the Section 250 deduction impact on the GILTI calculation, and the tax calculation related to the base erosion and anti-abuse tax (BEAT) under Section 59A. All of these calculations include some component of taxable income and thus the application of an NOL would have an impact. Please reach out to your KSM advisor if you need additional guidance or information related to these important provisions or complete this form.
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