Accounting Adjustments May Be Required for AMT Credits (article)
Corporate AMT refunds claimed under Section 53(e) will not be taking a hit for the federal deficit in 2018, according to a recent IRS update. The IRS made clear that businesses expecting a corporate AMT credit refund for tax years beginning after Dec. 31, 2017, will not have to have the credit refund be reduced by the federal sequestration rate. Businesses that had been planning for the sequestration-related deduction in their refund credits may need to update their accounting for 2018, particularly if they had used a valuation allowance or reserve against the AMT deferred tax asset or receivable.
The sequestration rate dates back to the Balanced Budget and Emergency Deficit Control Act of 1985, a law designed to alleviate government deficit spending. Under the law, refund payments for corporations claiming a prior year minimum tax liability—i.e., the corporate AMT credit—will be reduced by the fiscal year’s sequestration rate. For the 2019 fiscal year, the sequestration rate is 6.2 percent, and it applies to transactions processed on or after Oct. 1, 2018, but on or before Sept. 30, 2019, regardless of when the IRS receives the amended tax return with that transaction information.
Corporations may have been particularly affected by the sequestration rate in their 2018 tax year. They received an extra incentive to use the AMT credit under the 2017 tax reform law commonly known as the Tax Cuts and Jobs Act (TCJA). For tax years beginning Jan. 1, 2018, corporations can claim a first-year depreciation deduction under Section 168(k) and choose to accelerate their AMT credits, treating the AMT credits as a refundable credit.
The TCJA eliminated the corporate AMT and expands upon this AMT refundable credit election in Section 53. The Section 53(e) refundable AMT credit can offset tax liability in any year in an amount equal to 50 percent of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability. Section 53(e) refundable credits increase to 100 percent beginning in 2021.
How the Change Affects You
In its Jan. 14, 2019 update, the IRS said it will not be applying sequestration rates to corporate AMT refund payments and refund offset transactions taken under Section 53(e) for tax years beginning after Dec. 31, 2017. This statement was a reversal of an earlier statement by the IRS that the refunds under Section 53(e) would be subject to a 6.6 percent reduction for sequestration. The reversal was triggered by determinations made in December by the Office of Management and Budget (OMB) that corporations were entitled to full refunds of alternative minimum tax credits under the Tax Cuts and Jobs Act.
Companies may have recognized the refundable AMT tax credits as a component of deferred taxes or as a receivable. Companies that recognized the refundable AMT tax credit as a component of deferred taxes may have previously recognized, or planned to recognize, a valuation allowance against the deferred tax asset for the amount expected to be subject to sequestration. Companies that had recognized the refundable AMT tax credits as a receivable may have recognized an estimated credit loss for the expected amount subject to sequestration.
We believe that companies that previously recognized a valuation allowance on refundable AMT tax credits included in deferred taxes due to sequestration should reverse those valuation allowances in their financial statements ending Dec. 31, 2018 because the IRS announcement evidences that prior to year end, the IRS position would not be substantiated in court.
We also believe companies should reverse previously recognized estimates of credit losses related to sequestration on refundable AMT tax credits accounted for as receivables because the IRS announcement evidences conditions that existed (the recoverability of the receivable) as of the balance sheet date.
If reversing a valuation allowance or estimated credit losses recognized in previously issued financial statements, companies will need to make a note in the disclosures about the IRS announcement and the reason for that reversal. Companies that had previously not recognized a valuation allowance or estimated credit loss would take no action.
For more information about the accounting implications of the update, please contact us.
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