CARES Act Provisions of Interest to Insurers
Recent IRS announcements and the passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) introduces three significant tax changes of special interest to insurance companies. The first is the change to the net operating loss (NOL) carryback provisions. The second is the change to alternative minimum tax (AMT) refund provisions. Finally, the IRS announced postponement of both the filing and payment deadlines for certain returns. The three changes are explored below. Note, there are a host of other changes that apply to corporate filers. We encourage readers to visit our COVID-19 Resource Center for more information.
Net Operating Loss Carrybacks
The Tax Cuts and Jobs Act (TCJA) eliminated the carryback of NOLs generated in tax years beginning after December 31, 2017, for all C corporations, including life insurers, other than property/casualty (P&C) companies (and certain farming operations). P&C companies retained the two-year NOL carryback provisions from prior law.
The CARES Act amends Internal Revenue Code (IRC) Section 172, providing a five-year carryback for NOLs generated in the 2018 to 2020 tax years. This is welcome news for C corps and life insurers; however, P&C companies may want to closely examine the effect of these changes under the following circumstances:
- P&C companies with 2018 or 2019 NOLs that couldn’t be carried back because NOLs were generated in 2016 and 2017 tax years.
- Projected P&C NOLs generated in 2019 that, under prior law, were scheduled to be carried back to 2018 (for instance, 2017 was a loss year or not all of the 2019 NOL was absorbed in 2017), a year in which the 21 percent tax rate was in effect as opposed to a carryback to pre-TCJA years when the 34 percent/35 percent tax rate may have applied.
- P&C companies with potential 2020 NOLs that could be carried back to years as early as 2015; consider amending any prior carrybacks of 2018 and 2019 NOLs to the earliest available years to “clear the decks” for a 2020 carryback.
Refundable Alternative Minimum Tax Credits
The TCJA made existing AMT credits refundable, regardless of taxable income, based on the following schedule:
- 50% in 2018
- 25% in 2019
- 12.5% in 2020
- 12.5% (remainder) in 2021
The CARES Act amended IRC §53(e) to provide for a full refund of the AMT credit in 2018 (by election) or 2019. Companies that have already claimed 50 percent of the AMT credit could presumably amend their 2018 federal income tax returns and claim 100 percent of the credit by including the requisite election statement.
Other companies should weigh their cash flow needs. An amended return for 2018 may be filed immediately, whereas the 2019 return may not be prepared for several months. Filers also should consider how the expected 2019 AMT credit factors into their extension payment. Amending the 2018 return to claim the refund may merely result in an equal and offsetting increase in the extension payment for the 2019 tax year.
Delay of Extension & Estimated Tax Payments
In a recent announcement, the IRS postponed the 2019 income tax return filing and payment due date (including the 2020 first quarter estimated tax payment) to July 15, 2020. Many states have chosen to follow the federal changes, but there are exceptions.
Although this is a tax update, we can’t deny the challenges many of us currently face. Doctors, nurses and first responders are putting their health at risk to help treat and stop the spread of COVID-19. Families and friends are being separated for extended periods of time. People are scared and want a return to normal—a normal that seems to be a distant memory, a remnant of halcyon days never to return. Our resilience, though untested as of late, is a stronghold for our hope—and hope will carry us through. As Alfred, Lord Tennyson once said, “Hope smiles from the threshold of the year to come, whispering, ‘It will be happier.’”
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