On Jan. 16, 2020, the IRS announced that it will return the sequestered portions of refunds of alternative minimum tax credits (MTCs) to taxpayers who made a tax code Section 168(k)(4) election to forgo bonus depreciation in return for refundable MTCs.
The IRS announcement states, “[t]he IRS will restore any amounts sequestered since 2013 under section 168(k)(4). [The Office of Management and Budget (OMB)] determined that the refundable corporate minimum tax credit claimed under sections 53 and 168(k)(4) of title 26, U.S. Code as in effect for taxable years beginning before Jan. 1, 2018, is not subject to sequestration.”
The IRS mentioned in the announcement that it has a complete list of all taxpayers affected so taxpayers do not need to take any action, and refunds with applicable overpayment interest will be sent out during fiscal year 2020. However, any funds due to a taxpayer will be used to offset current tax liabilities first. The IRS estimates that less than 1,000 businesses are affected by the OMB determination.
The IRS’s announcement was a result of OMB reversing its long-standing position, originally announced by the IRS on Aug. 12, 2013, and most recently on Jan. 14, 2019, when OMB reversed its position relating to Section 53(e) refunds of MTCs. While the IRS’s announcement did not explain OMB’s reasoning for reversing its sequestration position, OMB must have ultimately concluded that refunding Section 168(k)(4) MTCs is not direct government spending and is no different than the refundable Section 53(e) MTCs, which OMB determined were not subject to sequestration at the end of 2018, and announced by the IRS on Jan. 14, 2019. As a result, refundable Section 168(k)(4) MTCs cannot be subject to sequestration under the Balanced Budget Act of 1985, as amended by the Budget Control Act of 2011, and budget agreements in 2013 and 2015.
The IRS started sequestering Section 168(k)(4) refunds related to the 2013 tax year and continued to apply sequestration to these refunds for subsequent tax years through Dec. 31, 2017, when the Tax Cuts and Jobs Act of 2017 repealed the Section 168(k)(4) election. Accordingly, the policy change affects five prior tax years, 2013 through 2017.
Although the IRS announcement states that “[a]dditional information will be shared regarding the timing and process for these reimbursements,” taxpayers whose Section 168(k)(4) refund checks were previously sequestered by the IRS should expect to receive refunds of, or credit for, the sequestered portion of the refundable Section 168(k)(4) MTCs reflected on taxpayers’ Schedule J of the Form 1120, U.S. Corporation Income Tax Return with overpayment interest sometime in 2020.
Even though the IRS appears to have assembled a complete list of taxpayers affected by OMB’s policy change, taxpayers should determine whether a Section 168(k)(4) election was made during their 2013 through 2017 tax years. Taxpayers with a refund opportunity triggered by OMB’s policy change should be proactive by verifying the sequestered amount of their refundable MTCs and computing overpayment interest to ensure that the IRS issues the proper refund amount.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Shawn R. O’Brien is a partner in the tax controversy practice at Mayer Brown LLP in Houston, email@example.com. Warren S. Payne is a senior advisor at Mayer Brown LLP in Washington, D.C., firstname.lastname@example.org. Maria C. Critelli is an associate in the tax controversy practice at Mayer Brown LLP in Chicago, email@example.com.
The opinions expressed are those of the authors and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be should not be taken as legal advice.