Tax Law Changes May Limit Benefits of New Loss Carryback Perk

Multinational companies should think carefully about how carrying back losses to more profitable years will impact their international tax strategy.

The stimulus law (Public Law 116-136) restored the ability for companies to use net operating losses as retroactive tax offsets, an appealing option as the Covid-19 pandemic decimates the economy. But companies that already opted into foreign income deductions or elected to pay a new transition tax in installments could see more limited benefit, and they may end up with a higher U.S. tax bill.

“My clients are getting excited that they can carry back and get a much needed cash infusion, but then they’re shocked and upset that it applies to all these other things,” said Robert Russell, a tax partner at Kostelantz & Fink LLP.

Modeling international tax scenarios will be essential for companies as they weigh what the carryback provision will mean for their overall U.S. tax bill.

“Taxpayers aren’t forced to take this deduction, but it’ll be a tough decision to waive it,” said Jose Murillo, EY Americas director of international tax and transaction services.

Exports Deduction

Companies should consider what benefit would come from a loss carryback if it applied to a year in which they took a deduction for U.S. exports.

The tax law created a new category of foreign income: global intangible low-taxed income (GILTI). Companies can deduct 50% of GILTI under tax code Section 250. But the operating loss is subtracted from that year’s income without taking the Section 250 deduction into account. That reduces, and could eliminate, the overall benefit of the loss carryback.

“The punchline is that people are by and large looking at taking advantage of NOL carrybacks but there is not a lot of planning you can do for what happens in a carryback year, other than carryback. Those decisions are pretty much locked down,” said Seth Green, principal and co-leader of the international tax group in the Washington National Tax practice of KPMG LLP.

Foreign Tax Credits

Loss carrybacks will also impact companies counting on foreign tax credits. A reduction in taxable income adjusts the amount of foreign tax credits available in that year, and the 2017 tax law restricts those credits from being carried forward.

“It’s surprising because the 2017 tax law modernized the tax system, but didn’t contemplate this type of interaction,” Murillo said.

Taxpayers can claim foreign tax credits up to 80% of their total GILTI.

“Long story short, current year losses and NOLs could cost you the benefit of both Section 250 deduction and your GILTI foreign tax credits,” Green said.

Installment Payments

The tax law created the Section 965 transition tax, also known as the repatriation tax. It applies at a rate of 15.5% on cash and cash assets, and 8% on illiquid assets.

Some companies elected to pay the tax in installments over eight years. But if they apply a loss carryback to one of those years, the refund is automatically applied to future installment payments.

“If the plan is to allow for taxpayers to file their NOLs and get refunds, then this defeats the purpose,” Russell said.