The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in the US on March 27, 2020, can have an immediate impact on income tax accounts. ASC 740 requires the effect of changes in tax rates and laws on deferred tax balances to be recognized in the period in which new legislations is enacted. In the case of US federal income taxes, the enactment date is the date the bill becomes law, which generally is upon presidential signature. The effects of the legislation on current and deferred tax accounts should be considered in the interim or annual reporting period including March 27, 2020.

Summary of key corporate income tax provisions of the CARES Act and income tax accounting considerations

• Establishes five-year carryback of net operating losses (NOLs) generated in 2018, 2019 and 2020
• Companies with NOL carrybacks should consider the current and deferred tax effects of carrying back NOLs. A taxpayer may elect to not carryback an NOL and may also elect to skip a year that included the IRC Section 965 transition tax. If carrying back to years beginning before January 1, 2018, tax receivables may be recorded at the 35% federal tax rate rather than the 21% tax rate.
• The carryback of NOLs can impact other tax calculations, including foreign tax credits, FDII, GILTI, BEAT, the IRC Section 199 deduction and IRC Section 965 transition tax calculations. Companies should consider whether the carryback of NOLs impacts the utilization of foreign tax credits, for example, that need to be assessed for current and deferred tax recognition. In addition, any NOL, foreign tax credit or other carryforwards arising as a result of the carryback of NOLs will need to be assessed for valuation allowance considerations.

• Temporarily suspends 80% limitation on the use of NOLs in 2018, 2019 and 2020
• Companies should consider the current and deferred tax effects of removing the 80% limitation on the use of NOLs in 2018, 2019 and 2020, including valuation allowance considerations.
• Allows immediate refund for AMT credit carryforwards
• Companies should consider reclassifying deferred tax assets or long-term receivables for AMT credit carryforwards to current receivables if a refund is expected within the next 12 months.
• Increases adjusted taxable income (ATI) limitation from 30% to 50% for business interest deductions under IRC Section 163(j) for 2019 and 2020
• Companies should consider the current and deferred tax effects of increasing the ATI limitation from 30% to 50% for business interest deductions for 2019 and 2020, including valuation allowance considerations.
• Retroactively clarifies that businesses may immediately write off qualified improvement property (QIP) costs beginning in 2018, rather than depreciating those costs over the 39-year life of the building or other property
• Companies should consider the current and deferred tax effects of this change. The change in deferred tax balances can also affect the analysis of the realizability of deferred tax assets and valuation allowance considerations.
• Increases 2020 charitable contribution deductions
• Companies should consider the current tax effects of the increase in 2020 charitable contribution deductions.

ASC 740 accounting reminders

Changes in tax laws or rates

For companies that have adopted ASU 2019-12, Simplifying the Accounting for Income Taxes, "[t]he tax effect of a change in tax laws or rates on taxes currently payable or refundable for the current year shall be reflected in the computation of the annual effective tax rate beginning no earlier than the first interim period that includes the enactment date of the new legislation." Prior to the adoption of ASU 2019-12, if the effective date of the provision is later than the enactment date, the impact of the change on the estimate of the payable or receivable for the current year would be included in the calculation of the estimated annual effective tax rate, beginning in the interim period including the effective date. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as a component of income tax expense from continuing operations in the period in which the change is enacted. The impact of any retroactive changes in enacted tax laws and the effect on taxes current payable/receivable and deferred tax assets and liabilities is determined at the date of enactment using temporary differences and currently taxable income existing as of the date of enactment and the tax effect is included in income from continuing operations.

Determining the estimated annual effective tax rate for an interim period

Under ASC 740, each interim period is considered an integral part of the annual period, and tax expense is measured using an estimated annual effective rate. A company is required, at the end of each interim reporting period, to make its best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. The estimated effective tax rate should reflect enacted federal, state and local income tax rates, foreign tax rates and credits, percentage depletion, capital gains rates, other taxes and credits, and available tax-planning alternatives. The rate should be revised, if necessary, as of the end of each successive interim period during the fiscal year to the entity's best current estimate of its annual effective tax rate. For additional discussion on estimating annual effective tax rates following COVID-19's economic effects, see Tax Alert 2020-0696.

State and local income tax considerations

Many of the CARE Act's provisions could have state and local income tax implications. Most state income tax laws use federal taxable income as a starting point for determining state income tax. While some states automatically adopt federal tax law changes, other states conform their laws with federal laws on specific dates. States also may choose to decouple from the new federal tax provisions and continue to apply current law. A company may need to follow one set of rules when determining taxable income for US income tax purposes and multiple sets of rules when determining state and local taxable income. Companies should carefully monitor state developments in response to the CARES Act.

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