The Tax Cuts and Jobs Act (TCJA) repeals the corporate alternative minimum tax (AMT) and provides a mechanism for taxpayers to recover unused AMT credit carryforwards as refunds. There’s a catch, though. Part of those refunds could be permanently lost under federal budget rules.
The Balanced Budget and Emergency Deficit Control Act of 1985, as amended, requires so-called “sequestration reductions” to certain categories of federal government spending when budgeted amounts exceed certain congressionally enacted caps. Various refundable tax credits are included in the categories of spending subject to reduction.
The IRS has indicated that the new AMT credit refunds under the TCJA fall within the categories of refundable tax credits that are subject to reduction. As a result, financial services organizations must determine whether and when they need to write off the portion of their tax assets that represent AMT credits that will be permanently lost. They also might consider taking steps to reduce the likelihood of the refund scenario even arising.
The TCJA and the AMT
Under pre-TCJA law, corporations annually paid the higher of their regular income tax liability or their AMT liability. If the AMT liability was greater, the difference between that liability and the regular liability became an AMT credit that corporations could carry forward indefinitely and use to reduce regular tax liability down to the AMT liability in each subsequent year. Under U.S. GAAP, companies recorded the AMT credit carryforward as a deferred tax asset (DTA) for financial reporting purposes because its future realizability depended on a company incurring future regular tax liability in excess of AMT liability.
The TCJA repeals the AMT for corporations for tax years beginning after Dec. 31, 2017, and allows taxpayers to recover their existing AMT credit carryforwards. Specifically, a corporation can use its AMT credit carryforwards to offset future regular income tax liability. In addition, corporations will receive 50 percent refunds for any credits that remain at the end of each year of 2018-2020; should any credits remain at the end of 2021, corporations will receive a 100 percent refund. In other words, the IRS will give a corporation refunds until the corporation has no AMT credit carryforwards remaining.1 Some corporations opted to reclass their AMT DTA to a tax receivable due to the refund feature.
Accounting for the AMT credit refunds
The IRS has confirmed that it intends to subject AMT credit refunds to any sequestration reduction percentage in effect for the federal fiscal year in which such a refund is processed.2 Each year, the Office of Management and Budget (OMB) is required to calculate the reduction amounts and provide them to Congress with the transmittal of the president’s budget. This historically occurs in February, when the budget is submitted for the fiscal year beginning the following Oct. 1. Refunds processed in the fiscal year ending Sept. 30, 2019, for example, will be reduced by 6.2 percent.
A financial statement reduction should be made when the sequester reduction percentage is known for the fiscal year in which a taxpayer expects an AMT credit refund. Once the sequestration reduction percentage is published for that federal fiscal year, the taxpayer should reduce the AMT credit carryforward tax asset that represents the estimated refund – whether a DTA or reclassified tax receivable – by the reduction percentage.
If a company expects to file its 2018 return in time for the IRS to process any AMT credit refund before Sept. 30, 2019, it should reduce its AMT credit carryforward tax asset by 6.2 percent of the estimated refund amount it expects to seek on its 2018 return. This reduction should be recorded in the period that includes Feb. 12, 2018 (the date the OMB released the percentages for fiscal year 2019). However, if a company asserts that it will extend its 2018 tax return and not file until after Sept. 30, 2019, it would not record a reduction until it knows the sequestration percentage that will be in place for fiscal year 2020 (the earliest time the IRS could process the refund).
For example, assume a calendar-year public financial services organization has $1 million of AMT credits carrying forward into 2018 (all of which is available for immediate use). For cash flow reasons, the organization prefers to obtain any AMT refund as quickly as possible, so it plans to file its 2018 tax return by the original April 15, 2019, due date and expects any refund to be processed by Sept. 30, 2019. In the first quarter of 2018, the corporation estimated that it will have $100,000 of federal tax liability for its 2018 return and thus expects a $450,000 refund of AMT credits on its 2018 return:
$1 million of AMT credit - $100,000 used to reduce 2018 liability to zero = $900,000 x 50% = $450,000 AMT credit refund
In that first quarter, the organization would have reduced its AMT credit carryforward tax asset by $27,900 ($450,000 refund x 6.2% sequestration reduction). In subsequent quarters, any change in the estimated AMT refund amount, which would also change the estimated sequestration reduction amount, would need to be re-evaluated.
What if the organization decided to extend and file its 2018 return between Oct. 1, 2019, and Oct. 15, 2019, meaning any refund would be processed by the IRS during its fiscal year 2020? Because the sequester reduction percentage for that fiscal year is not yet known, the company would not make any reduction to the AMT credit carryforward tax asset. If, in February 2019, OMB were to issue the fiscal year 2020 reduction percentage as 5.5 percent, the organization would, in the first quarter of 2019, record a $24,750 ($450,000 x 5.5%) reduction to the amount of AMT refund it expects to receive on its 2018 return.
Strategies to avoid sequestration losses
Note that the annual 50 percent refund does not appear to be optional. A corporation cannot opt to skip the refund and retain the full credit to use in the next year. Therefore, when feasible, financial services organizations should consider accelerating their regular federal tax liability to absorb their AMT credits, thus reducing or eliminating recovery through refunds that will be subject to any sequestration reductions.
An organization could, for example, forego bonus depreciation deductions in 2018 to increase its tax liability for the year, instead claiming the depreciation in subsequent years. Companies also could adopt various tax accounting methods that would accelerate the recognition of revenues or defer the recognition of other deductions. Accrued bonuses present another possibility – an organization could change its bonus plan terms to require it to deduct the bonuses in the year paid, rather than the year accrued. Organizations that are planning to sell branches, other real estate owned (OREO) properties, or other assets at a tax loss could consider delaying the sales until the next year. Conversely, if the sales will generate tax gain, accelerating closure into an earlier tax year could benefit AMT credit recovery.
Financial services organizations should realize that they could permanently lose some of their AMT credits to sequestration reductions. Timely planning can help them minimize such losses and account for them properly.
1 It is not yet clear whether the IRS will interpret the refund provisions of the TCJA to mean that 100 percent of AMT credit carryforwards will be refunded at the end of 2021 regardless of any limitations by IRC Section 382, “Limitations on net operating loss carryforwards and certain built-in losses following ownership changes,” and Section 383, “Special limitations on certain excess credits, etc.” For more information on this possibility, see “Changes to Corporate Alternative Minimum Tax Raise Issues and Opportunities for Banks.” https://www.crowe.com/insights/financial-institutions-executive-briefing/financial-institutions-executive-briefing-1-19-2018
2 “Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations,” Internal Revenue Service, March 28, 2018,