The CARES Act provides new rules for insurance companies to consider, most of which may require attention in the short run.
- Companies should consider either amending returns or requesting ‘quick’ refunds based on the new NOL and AMT credit acceleration provisions. Companies that should consider analyzing these issues include (1) companies with losses in 2018 or 2019, or those that anticipate losses in 2020, which have carryback capacity in years up to five years earlier, and (2) companies with corporate AMT credits that have not yet been recovered.
- Due to the change in tax rates from 35% to 21%, carryback of post-2017 NOLs to pre-2018 years may be particularly valuable.
- Unfortunately for many taxpayers, there is no change to the carryback/carryforward provisions for capital losses (these losses may be carried back three years and carried forward five years). Companies that sell capital assets at a loss in order to pay abnormal insurance losses may be eligible to carry back such losses against ordinary income under Section 832(c)(5). Further analysis would be required to determine the potential impact from this provision.
- Because NOLs have an impact on a number of other provisions, a thorough evaluation of the effect of a carryback is required, and scenario planning may be needed to account fully for the impact on BEAT, global intangible low-taxed income (GILTI), and NOL usage limitations in accordance with Section 382, separate return limitation year (SRLY) rules, and life/nonlife consolidated returns.
- The default rule for NOL carrybacks in the CARES Act requires a company to carry back NOLs to available years. In addition to ‘bumping,’ ‘eligibility,’ and ‘subgroup’ limitations, these rules can cause NOLs carried forward from a ‘foregone’ carryback year to be ‘forever’ precluded from being used to offset future taxes of the other subgroup. Consideration should be given to whether to forgo an NOL carryback in a life/nonlife consolidated return.
- Losses of a foreign insurance company treated as a domestic corporation by reason of a Section 953(d) election are treated as dual consolidated losses (DCLs). Analysis should be made of the impact of the carryback provisions to DCLs.
- Attention should be paid to the process for corporate AMT refunds. For example, amended returns may be required, rather than an application for quick refund, if the due date has passed for requesting a quick refund.
- Many states do not follow the federal rules for NOLs. Companies should examine what relief states may offer, and assess the most efficient way to meet compliance obligations.
- The federal tax rate changed from 35% to 21% as a result of the 2017 Act. Accordingly, the tax rate differential should be considered for any NOLs that are expected to be carried back to a year before the tax rate change was effective. This rate differential may impact the tax provision in several ways, including:
- The tax benefit for remeasuring deferred tax assets related to prior year NOLs (i.e., tax years ending in 2018 and 2019) expected to be carried back should be recorded discretely in the period of enactment.
- Any existing temporary differences (currently recorded at a 21% rate) that are expected to reverse during the year and become part of a loss that will be carried back to a 35% year should be remeasured to 35% discretely in the period of enactment.
- The tax benefit for the rate differential related to losses recognized during the current year should be included in the annual effective tax rate.
For additional details relating to the relief provisions summarized above, and other provisions not covered here, please refer to PwC’s previously issued Tax Insight: “Senate passes Phase Three COVID-19 economic stabilization legislation,” March 26, 2020.