As part of the U.S. government's response to the economic disruption caused by the Novel Coronavirus (COVID-19), on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748 or the CARES Act) was enacted. The CARES Act contains a number of federal income tax provisions intended to provide relief or liquidity to business taxpayers, including:

• Provisions relaxing limitations on the use of net operating losses (NOLs) and suspending the prohibition on NOL carrybacks;
• Provisions relaxing limitations on the deductibility of business interest; and
• An acceleration of refundable corporate alternative minimum tax (AMT) credits.

Additionally, the CARES Act contains a number of technical amendments to the NOL provisions of the Tax Cuts and Jobs Act (Pub. L. 115-97 or the Tax Act).

Net Operating Loss Provisions

The CARES Act provisions addressing NOLs temporarily relax a number of restrictions put in place by the Tax Act on the utilization of NOLs, including the 80 percent taxable income limitation and the general prohibition on NOL carrybacks. In addition, the CARES Act makes a number of technical amendments to the Tax Act's NOL provisions.

• Suspension of 80 Percent Limitation—Prior to the enactment of the CARES Act, under Section 172 of the Internal Revenue Code of 1986, as amended (the Code), a taxpayer's deduction for NOLs arising in taxable years beginning after December 31, 2017 (NOLs arising post-2017) was limited to no more than 80 percent of the taxpayer's taxable income (the 80 Percent Limitation). The CARES Act suspends the 80 Percent Limitation for taxable years beginning before January 1, 2021. For calendar year taxpayers, this means that NOLs carried forward or back to taxable years 2018, 2019, or 2020 may offset up to 100 percent of a taxpayer's taxable income for those years.
• 5-Year Carryback of Certain NOLs—Prior to the enactment of the CARES Act, NOLs arising post-2017 generally could not be carried back to prior taxable years but could be carried forward to future taxable years indefinitely. The CARES Act allows a five-year carryback (the 5-Year Carryback) for NOLs arising in taxable years beginning after December 31, 2017 and before January 1, 2021 (taxable years 2018, 2019, and 2020, for a calendar year taxpayer) and such NOLs can still be carried forward indefinitely.
• Prohibition on Using the 5-Year Carryback to Offset Net Section 965 Inclusions
  • Background—Prior to the enactment of the CARES Act, as part of the transition to the Tax Act's new rules governing investments by U.S. taxpayers in foreign corporations, Section 965 of the Code (the so-called "transition tax") generally required certain United States shareholders of foreign corporations to include in income an amount reflecting a share of the foreign corporations' post-1986 earnings and profits. Section 965 inclusions were eligible for a special deduction under Section 965(c) of the Code intended to reduce the effective rate of tax on such inclusions to either 8 percent or 15.5 percent (depending on the cash position of the foreign corporation). Additionally, taxpayers were permitted to make an election under Section 965(n) not to take into account the Section 965 inclusion (net of the Section 965(c) deduction) for purposes of determining taxable income that could be reduced by NOLs carried to the year of the Section 965 inclusion.
  • CARES Act Provision—If a taxpayer carries an NOL back under the 5-Year Carryback to a taxable year in which the taxpayer was required to include income under Section 965, the taxpayer will be deemed to have made the election under Section 965(n) to forgo use of the NOL in the taxable year to which the NOL is carried back to the extent of the net amount required to be included in income on account of Section 965. Alternatively, the CARES Act allows taxpayers to exclude from the 5-Year Carryback altogether all taxable years in which the taxpayer recognized a Section 965 inclusion. Either way, NOLs that are carried back under the 5-Year Carryback cannot be used to offset a Section 965 inclusion. Which option is preferable to a particular taxpayer will depend on a number of factors, including the impact of the deemed Section 965(n) election on the taxpayer's ability to utilize foreign tax credits in the year of the Section 965 inclusion.
• Modification of the 80 Percent Limitation—Prior to the enactment of the CARES Act, under the 80 Percent Limitation, NOLs arising post-2017 were allowed as a deduction up to an amount equal to 80 percent of the taxpayer's taxable income (calculated without taking into account the NOL deduction). The CARES Act modifies the 80 Percent Limitation for taxable years beginning after December 31, 2020 by additionally disregarding the deductions allowed under Section 199A (for certain "qualified business income", including from certain pass-through entities) and Section 250 (for "foreign-derived intangible income" (FDII) and "global intangible low-taxed income" (GILTI)). Calculating the 80 Percent Limitation without regard to Section 199A and Section 250 deductions more closely aligns the 80 Percent Limitation with the calculation of the amount of an NOL in the year in which it arises as well as the amount of an NOL that is absorbed when it is carried over or back, which, in each case, is likewise made without regard to these deductions.
• Clarification on the Application of the 80 Percent Limitation—The CARES Act clarifies the application of the 80 Percent Limitation if both NOLs arising post-2017 and NOLs arising in a taxable year beginning before January 1, 2018 (NOLs arising pre-2018) are carried to a taxable year beginning after December 31, 2020. In that case, taxable income (determined without regard to Section 199A, Section 250 or NOL deductions) would be reduced by 100 percent of NOLs arising pre-2018, and NOLs arising post-2017 would be allowed as a deduction up to the amount of 80 percent of any remainder.
• Technical Amendment to Carryback Effective Date; Extension of Time to Apply for a "Quickie Refund" for Affected Taxpayers—The CARES Act provides that the general prohibition on the carryback of NOLs contained in the Tax Act would apply to NOLs arising in taxable years beginning after December 31, 2017 (instead of ending after that date, as originally provided by the Tax Act). This is relevant for non-calendar year taxpayers who incurred an NOL in their taxable year beginning in 2017 and ending in 2018; as amended by the CARES Act, the Tax Act's prohibition on NOL carrybacks would not apply to that NOL. The CARES Act allows affected non-calendar year taxpayers to file an application for a tentative carryback adjustment (a so-called "quickie refund") within 120 days of the date that the CARES Act is enacted (or by July 27, 2020) to permit taxpayers to more quickly claim the cash benefit of this correction.

Business Interest Limitation

The CARES Act temporarily relaxes some of the restrictions on the deductibility of business interest enacted by the Tax Act, including by increasing the percentage of (non-interest) business income that can be offset by interest deductions from 30 percent to 50 percent and by permitting taxpayers to calculate their business interest limitation for 2020 by using their 2019 taxable income.

• Increase of 30 Percent Limitation to 50 Percent—Prior to the enactment of the CARES Act, under Section 163(j) of the Code, a taxpayer was generally permitted to deduct business interest paid or accrued only to the extent of business interest income, plus 30 percent of "adjusted taxable income." The CARES Act increases the limitation from 30 percent to 50 percent of adjusted taxable income for taxable years beginning in 2019 or 2020 (except with respect to entities taxed as partnerships, as described below).
• Election Out—A taxpayer is entitled to elect to continue to apply the 30 percent limitation for taxable years beginning in 2019 or 2020. Such an election might be desirable if an increase in interest deductions would result in less efficient use of other tax attributes (e.g., NOLs or foreign tax credits).
• Special Rule for Partnerships—Under the CARES Act, the 50 percent limitation applies to entities taxed as partnerships only for taxable years beginning in 2020. If a partnership has excess business interest (i.e., business interest deductions in excess of the amount allowed under the general limitation) for a taxable year beginning in 2019, unless a partner elects otherwise, the CARES Act treats each partner's share of that excess as follows:
  • Half of the excess is treated as business interest paid or accrued by the partner in its first taxable year beginning in 2020 and is not subject to the general limitation on the deductibility of business interest.
  • The remainder is carried forward and is subject to the normal limitation applicable to excess business interest of a partnership. If a partner is allowed to deduct this amount in a taxable year beginning in 2020, presumably the 50 percent limitation (instead of the 30 percent limitation) described above would apply, unless the partner elected otherwise.
  If a partner elects out of the application of these rules, the partner's entire share of partnership excess business interest would be subject to the normal rules in the second bullet above.
• Election to Use 2019 Adjusted Taxable Income—The CARES Act allows a taxpayer to calculate the business interest limitation for a taxable year beginning in 2020 based on its adjusted taxable income for its last taxable year beginning in 2019. The election could benefit a taxpayer that had greater adjusted taxable income in 2019 than in 2020 and wanted to increase its business interest limitation.

Acceleration of Credit for Corporate AMT

• Acceleration of Refundable Credit—Prior to the enactment of the CARES Act, corporate taxpayers were allowed a refundable credit in respect of AMT that was paid before the repeal of the corporate AMT by the Tax Act (and not previously credited). The credit could be claimed over a four-year period beginning with the corporation's taxable year beginning in 2018. The CARES Act accelerates the refundable credit so 50 percent of the remaining uncredited AMT balance is creditable in the corporation's taxable year beginning in 2018 with the remainder creditable in the corporation's taxable year beginning in 2019.
• Election to Further Accelerate Refundable Credit—The CARES Act allows a corporate taxpayer to elect to accelerate the entire uncredited AMT balance as a credit for the corporation's taxable year beginning in 2018. In that case, the procedures applicable to tentative carryback adjustments (so-called "quickie refunds") apply for purposes of seeking a refund for the credit, which is intended to allow taxpayers to benefit from the cash generated by the credit more quickly.