The CARES Act introduced changes to net operating loss and interest deduction limitations, which can impact companies with global operations
Consider these provisions, along with other tax relief opportunities related to the crisis, when tax planning
The COVID-19 pandemic has had a profound impact on companies’ supply chains and cash flow. Tax provisions created in the Coronavirus Aid, Relief, and Economic Security (CARES) Act could provide relief for global organizations.
Incorporate the new tax provisions into your tax planning process. These tax opportunities could bring additional cash flow to address challenges associated with the crisis, such as workforce and supply constraints, increased demand for goods and services, and difficult operations planning.
Tax relief provisions in the CARES Act
The CARES Act, signed on March 27, 2020, includes significant tax relief provisions to help provide liquidity to U.S.-based businesses. Two such provisions relate to changes in the net operating loss (NOL) and interest deduction limitations under Internal Revenue Code Sections 172 and 163(j), respectively.
Specifically, the CARES Act enables NOLs that are generated in tax years 2018, 2019, and 2020 to be carried back up to five tax years. Prior to the CARES Act, these losses could not be carried back.
For Section 163(j), the limit on the deductibility of business interest was increased from 30% to 50% of adjusted taxable income for tax years beginning in 2019 and 2020, and an election by the taxpayer can be made to keep the 30% limitation. For partnerships, the CARES Act increases the limitation to 50% only for taxable years beginning in 2020. For partnership taxable years beginning in 2019, the limitation remains at 30%. However, half of a partnership’s excess business interest expense allocated to a partner for a 2019 taxable year can automatically be treated as deductible interest expense in 2020.
Evaluate these and other new CARES Act provisions and their impacts to existing U.S. international tax attributes, such as:
- Foreign tax credit carryovers or carrybacks
- Section 965 income inclusions and any related elections and foreign tax credits
- Global intangible low-tax income (GILTI) inclusions and related deduction under section 250(a)(1)(B) and foreign tax credits
- Foreign-derived intangible income (FDII) deduction under section 250(a)(1)(A)
Tax planning tips for global companies
Evaluate the immediate, short-term, and long-term options your organization is facing and determine how tax planning may factor into your decision-making. Consider some of these immediate opportunities:
- Assess if 2019 U.S. or local country tax returns have been filed and what has been paid to local authorities. The U.S. and other countries have pushed the filing and payment deadlines back. Early filing may be advisable if refund opportunities exist as a result of the tax planning strategies available in the CARES Act or as described in this article.
- Appropriate transfer pricing adjustments for 2019 can be considered, depending on the jurisdiction and timing of the most recent studies.
- Evaluate the supply chain and impacts of additional expedited taxes and fees that may result from moving exports and imports through an affected country’s backlogged customs authority.
In the near-term, you could focus on reassessing 2020 planning, based on the impact of 2020 operating results. Evaluate whether you could move cash into or out of affected countries to pay for crisis-related expenses. With significant swings in foreign exchange rates, distributions from foreign subsidiaries to their U.S. parent may trigger losses in the U.S. Modifications to loans between foreign affiliates may also trigger foreign exchange loss if the loan is denominated in a non-U.S. dollar currency. Both U.S. and foreign withholding tax impacts should factor into this treasury planning.
How we can help
Unforeseen disruptions — from the coronavirus (COVID-19) to natural disasters — can create many uncertainties. CLA has developed resources to help you lay out a strategy to put your organization on its toes versus its heels. Bookmark our financial management and disaster relief resource page to stay current on these issues.
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit CLAconnect.com.
David Springsteen and Kyle Dawley