The benefit arises from a complex set of ordering rules for computing and using alternative minimum tax (AMT) NOLs when an election has been made for an extended carryback period.
Generally, an AMT NOL can only offset 90% of the alternative minimum taxable income (AMTI) for any year to which the AMT NOL is carried. A taxpayer that had significant NOLs might be able to completely eliminate its regular tax, but still have an AMT liability because only 90% of the AMTI can be offset.
The additional benefit from the election for 2008 or 2009 may permit taxpayers to reduce to zero ($0) the amount of AMT due for many years in the future because an election year AMT NOL can offset up to 100% (rather than the usual 90%) of its alternative minimum taxable income (AMTI) for any year to which the AMT NOL is carried, either backward or forward.
Under the Worker, Homeownership, and Business Assistance Act of 2009 (the Act), taxpayers were generally allowed to elect to use the election year NOL (from one tax year either beginning or ending in 2008 or 2009) for an extended carryback period of three, four, or five years preceding the election year.
Another benefit of the extended carryback election came in the form of AMT relief—an AMT NOL from the election year would also be carried three, four, or five years, but, in addition, the Act allowed taxpayers to further reduce or even eliminate AMT by using election year AMT NOLs to offset any remaining AMTI in any year, past or future, to which it is carried.
The Act in effect created two distinct categories of AMT NOLs—election year AMT NOLs and nonelection year AMT NOLs.
If a taxpayer has both an election year AMT NOL and nonelection year AMT NOLs, it becomes necessary to determine in what order the AMT NOLs are used.
The additional benefit to taxpayers stems from these ordering rules.
The ordering rules are applied as follows:
- Separate the nonelection year AMT NOLs from the election year AMT NOLs
- Use the nonelection year AMT NOLs on a first-in first-out (FIFO) basis
- Use the election year AMT NOL to eliminate any AMTI remaining after the nonelection year AMT NOLs are deducted
The election year AMT NOL is always used last. For taxpayers incurring an NOL in a year after the election year AMT NOL, the special ordering rules may result in a recomputation of prior year return amounts to reduce the election year AMT NOL previously claimed. This recomputation typically would not require the taxpayer to amend prior year returns, but instead would be reflected in the AMT NOL carryover schedules.
Overall, these beneficial rules have the effect of allowing taxpayers to spread the use of election year AMT NOLs over several years, and may permit taxpayers to reduce to zero ($0) the amount of AMT due for many years in the future.
The computation and utilization of a taxpayer’s AMT NOLs for nonelection years and the election year can be complicated because events subsequent to the filing of the taxpayer’s return for the year can affect the amount of AMT due. However, the benefits of eliminating AMT in all tax years until the taxpayer eventually uses all of its election year AMT NOL are likely to make it worthwhile for a taxpayer to understand and comply with the ordering rules.
For more information, contact a tax professional in KPMG’s Washington National Tax practice: