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Economic Analysis: CARES Act Second-Quarter Effects: S&P 500 Companies Report to SEC

Posted on Aug. 24, 2020

The tax provisions of the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) are intended to provide liquidity and maintain employment. According to official estimates, nearly $700 billion should be available to American businesses during the first 18 months after enactment, three-quarters of that in fiscal 2020 (ending September 30). But with notable exceptions — like Marathon Petroleum Corp., which is expecting a $1.1 billion refund — the tax benefits of the CARES Act don’t seem like a big deal for most of the companies comprising the S&P 500.

In the 90-day period ending August 17, 10-Q reports were filed with the SEC by 463 of the companies comprising the S&P 500. Of those 463 companies, only 257 even mentioned the CARES Act. And of those 257, less than half indicated that CARES Act tax provisions had a noticeable effect. By “noticeable” we mean the company reported that one or more of the CARES Act provisions had an impact — whether quantified or not — on its tax expense or cash flow. (In this analysis, mere mention or recitation of the provisions in the CARES Act is not considered to indicate there was an impact.)

Net Operating Losses

The Tax Cuts and Jobs Act ended carrybacks of net operating losses. The CARES Act reinstated them, and more. Instead of the prior-law carryback period of two years, the CARES Act allowed losses generated in 2018, 2019, and 2020 to be carried back five years. Because the corporate tax rate was 35 percent before 2018 and is now 21 percent, these carrybacks are especially lucrative.

We identified 32 companies that reported they were benefiting from the CARES Act NOL provision. Of those, 16 provided quantifiable amounts. Sometimes those were the amount of refunds (or accounts receivable) attributable to a carryback. Sometimes the amounts represented the effect of the income tax provisions (that is, the numerator of the reported effective tax rate). Also, sometimes the amounts were definite because they were attributable to prior-year losses, but sometimes they were estimates because 2020 losses are still unknown.

Table 1 lists some of the more prominent examples of businesses reporting carrybacks. (The complete list from which the sample in Table 1 is drawn, as well as the complete lists underlying the samples presented in other tables, are available here.) So far, it seems the major beneficiaries of the CARES Act NOL relief are oil companies, electric utilities, retailers, and taxable subsidiaries of real estate investment trusts.

One particularly interesting report comes from Prudential Financial Corp., which reports a massive $512 million tax benefit from the NOL carryback provision. But, consistent with warnings from many commentators, the benefit was partially offset by the carryback reducing $140 million of foreign tax credits for global intangible low-taxed income.

Payroll Tax Credits

Under the CARES Act, employers with more than 100 employees can obtain a refundable payroll tax credit, called the employee retention tax credit, of up to $5,000 per employee through the end of 2020 as long as those employees aren’t providing services to the employer. We identified 24 companies in the S&P 500 that were generating benefits from the CARES Act NOL provision. Of those, 16 provided quantifiable amounts, for a total of about $850 million in tax credits. That amount would support the paid leave of at least 170,000 employees. Table 2 shows the biggest beneficiaries of the ERTC are Starbucks Corp. ($301 million), United Airlines Holdings Inc. ($142 million), and MGM Resorts (about $100 million).

Interest Limitation

The TCJA instated a limitation on interest deductibility equal to 30 percent of adjusted taxable income. The CARES Act raised that limit to 50 percent for 2019 and 2020. Moreover, it allows taxpayers to use 2019 adjusted taxable income for their 2020 limitation (because low profit and losses in 2020 could greatly increase the effect of the limit). We identified only 11 companies reporting a favorable effect from the relaxed limitation and, as shown in Table 3, most of those benefits, when quantified, are modest.

Payroll Tax Deferral

The most-used business CARES Act tax benefit by S&P 500 companies appears to be payroll tax deferral. Under the act, businesses may defer the employer portion of post-enactment-date Social Security taxes (equal to 6.2 percent of employee wages up to $132,900). One-half of the deferred amount must be paid by December 31, 2021, and the other half by December 21, 2022. In effect, employers are getting large interest-free and hassle-free loans from the U.S. treasury. (It should be noted, however, that there can be a temporary negative effect on income tax liabilities because deductions for those taxes are also postponed.) As shown in Table 4, the biggest winners in this category appear to be United Parcel Service Inc., which reports an expected temporary cash flow benefit of $1 billion for 2020, and Kroger Co., which expects to defer $600 billion through 2020.

AMT Credits

Congress repealed the corporate alternative minimum tax when it enacted the TCJA, and it allowed taxpayers to use outstanding AMT credit carryforwards over the following four years (through 2021). The CARES Act suspends the waiting period; in so doing, it provides another method of injecting liquidity into corporations. We identified 21 companies in the S&P 500 that have received or are expecting AMT credit refunds. Table 5 shows the largest recipients of these refunds were Duke Energy Corp. ($572 million) and Hartford Financial Service Group Inc. ($410 million).

Materiality Threshold?

What is absent from the latest quarterly reports is perhaps more interesting than what is included. Was the CARES Act really so inconsequential that nearly half of America’s largest corporations saw no reason to mention it to shareholders?

Corporations must report information that is material. What does that mean? Effective in August 2018, the Financial Accounting Standards Board amended the definition of materiality so that it means “the omission or misstatement of an item in a financial report is material if, in light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.”

On June 23 the SEC issued guidance that included this question for consideration in financial reporting: “Are you taking advantage of any recent tax relief, and if so, how does that relief impact your short- and long-term liquidity? Do you expect a material tax refund for prior periods?”

Obviously, significant subjective judgment is involved in what is reported. Many companies report they are still studying the CARES Act provisions. Perhaps more will come to light about the CARES Act, especially the NOL provisions, as the act’s implications become better understood and the size of losses in 2020 — whether attributable to deteriorating business conditions or improved tax planning — become better known.

Table 1. Ten* Notable Reports of NOL Carrybacks in Second Quarter 10-Q Filings to the SEC by S&P 500 Companies

Company

SIC Industry

Relevant Text From 10-Q Report

Occidental Petroleum Corp./DE/

1311 — Crude Petroleum & Natural Gas

“As of the date of this report, Occidental received approximately $170 million of cash refund as a result of the aforementioned AMT credit and NOL carryback provisions and anticipates an additional $25 million cash refund by the end of the year.”

DiamondBack Energy Inc.

1311 — Crude Petroleum & Natural Gas

“The Company has considered the impact of this legislation in the period of enactment, resulting in discrete income tax benefit for the three months ended March 31, 2020 related to the anticipated carryback of approximately $179 million of the Company’s federal net operating losses . . . refund associated with such carryback as well as the accelerated refund available for minimum tax credits, the company’s current federal taxes receivable total approximately $101 million as of March 31, 2020 and June 30, 2020.”

Marathon Petroleum Corp.

2911 — Petroleum Refining

“We recorded an overall income tax benefit of 1.6 billion for the six months ended June 30, 2020, of which $309 million was attributable to the tax rate differential in the carryback years resulting from the expected NOL carryback provided under the CARES Act. . . .

Based on the estimated NOL carryback, as provided by the CARES Act, we recorded an income tax receivable of $1.1 billion.”

National Oilwell Varco Inc.

3533 — Oil & Gas Field Machinery & Equipment

Company refined its estimated income tax benefit during the three months ended June 30, 2020, resulting in a reduction to the income tax benefit from $123 million to $100 million. The Company received a cash refund of $94 million in June 2020 and anticipates receiving an additional refund upon the filing of the final 2019 United States income tax return and final net operating loss carryback claim to 2014.

Baker Hughes Co.

3533 — Oil & Gas Field Machinery & Equipment

“During the three months ended June 30, 2020, we elected to carry back losses to 2014 and accordingly recognized a $75 million tax benefit.”

DTE Energy Co.

4911 — Electric Services

The receivable is comprised of $153 million for the immediate refund of the 2018 remaining AMT credit balance and $67 million as a result of carrying back the 2018 net operating loss to 2013. In addition, the carryback of the 2018 net operating loss to 2013 resulted in a $34 million reduction in Income tax Expense for the three and six months ended June 30, 2020 due primarily to the difference in rates between the two years (35% in 2013 and 21% in 2018).

Prudential Financial Inc.

6311 — Life Insurance

“The Company has incorporated into the full year projected effective tax rate an income tax benefit of $512 million that would result from carrying the estimated 2020 NOL back to tax years that have a 35% tax rate. The projected tax benefit related to the NOL carryback was partially offset by an incremental Global Intangible Low-Taxed Income (‘GILTI’) tax expense of $140 million driven by projected overall domestic losses (‘ODLs’) which resulted in a reduced GILTI foreign tax credit. . . . The first six months of 2020 also include a $47 million reduction in income tax expense recorded as a discrete item from the carryback of 2018 NOL and related ODL.”

Assurant Inc.

6399 — Insurance Carriers

“We carried back net operating losses to 2013 and 2014, resulting in a refund claim of $198.4 million. . . . In July 2020, we received the full amount of the refund plus interest related to the net operating losses we carried back under the CARES Act, a portion of which will be included in third quarter 2020 holding company liquidity and will largely consist of the $84.4 million tax benefit the Company recorded in First Quarter 2020 and Second Quarter 2020.”

Host Hotels & Resorts Inc.

6798 — Real Estate Investment Trusts

“For the quarter and year-to-date, we recorded an income tax benefit of $46 million and $83 million, respectively, due to the net operating loss incurred by our [taxable REIT subsidiary]. As a result of legislation enacted by the CARES Act, such net operating loss may be carried back up to five years in order to procure a refund of federal corporate income taxes previously paid.”

MGM Resorts International

7011 — Hotels & Motels

“Refund of federal income taxes due to a five-year carryback of net operating loss incurred in 2020 when our 2020 tax return is filed, which we estimate will result in a $225 million to $250 million refund that we expect to receive in the second or third quarter of 2021.”

*Complete List of 32 Companies Reporting NOL Carrybacks Is Available at //s3.amazonaws.com/pdfs.taxnotes.com/2020/2020-32170_Sullivan_Tables_CARES_Act_2Q_SP_500.docx.

Table 2. Ten* Notable Reports of Employee Retention Tax Credit in Second Quarter 10-Q Filings to the SEC by S&P 500 Companies

Company

SIC Industry

Relevant Text From 10-Q Report

Tyson Foods Inc.

2015 — Poultry Slaughtering and Processing

“In the third quarter of fiscal 2020, we recognized a benefit of approximately $20 million related to the refundable payroll tax credit provision.”

VF Corp.

2320 — Men’s & Boys’ Furnishings

“The CARES Act, among other things, provides employer payroll tax credits for wages paid to employees unable to work during the COVID-19 pandemic and options to defer payroll tax payments. . . . During the first quarter of Fiscal 2021, the Company recognized $50.4 million as a result of relief from the CARES Act and other governmental packages, which were recorded as a reduction in selling, general and administrative expenses.”

Xerox Holdings Corp.

3577 — Computer Peripheral Equipment

“The CARES Act also provides refundable employee retention credits. . . . Similar pay protection programs were enacted in Canada and Europe. . . . We recognized savings of approximately $60 million from these temporary measures in the U.S., Canada and Europe.”

United Airlines Holdings Inc.

4512 — Air Transportation, Scheduled

$142 million in tax credits provided by the Employee Retention Credit under the CARES Act related to the second quarter of 2020.”

L Brands Inc.

5621 — Retail — Women’s Clothing Stores

“During the first quarter of 2020, the Company recognized $52 million of qualified payroll tax credits that reduced its store operating expenses.”

Best Buy Co. Inc.

5731 — Retail — Radio, TV & Consumer Electronics Stores

“Based on our preliminary analysis of the CARES Act, we reduced our SG&A expenses for the three months ended May 2, 2020, by $69 million for employee retention credits.”

Starbucks Corp.

5810 — Retail — Eating & Drinking Places

“During the quarter and three quarters ended June 28, 2020, the qualified payroll credits reduced our store operating expenses by $266.0 million and $301.0 million.”

Las Vegas Sands Corp.

7011 — Hotels & Motels

“We have maintained our staffing levels across our jurisdictions through the government mandated closures amid significantly reduced visitation. The level of payroll costs during the period were reduced by $76 million in connection with the Job Support Scheme in Singapore and the Employee Retention Credit under the CARES Act in the U.S.”

MGM Resorts

7011 — Hotels & Motels

“Reduction of employer Federal Insurance Contributions Act (“FICA”) taxes equal to 50 percent of wages paid and health care coverage provided to furloughed employees during 2020, which we estimate will result in permanent savings of approximately $95 million to $105 million, and of which $42 million and $91 million was recorded in the three and six months ended June 30, 2020.”

HCA Healthcare Inc.

8062 — Services — General Medical & Surgical Hospitals

“During the second quarter of 2020, the Company evaluated its eligibility for this credit and recorded $60 million of employee retention payroll tax credits pursuant to the CARES Act.”

*Complete List of 24 Companies Reporting ERTCs Is Available at //s3.amazonaws.com/pdfs.taxnotes.com/2020/2020-32170_Sullivan_Tables_CARES_Act_2Q_SP_500.docx.

Table 3. Four* Notable Reports of Use of 50% Interest Limitation in Second Quarter 10-Q Filings to the SEC by S&P 500 Companies

Company

SIC Industry

Relevant Text From 10-Q Report

Perrigo Co. PLC

2834 — Pharmaceutical Preparations

“We also experienced a decrease in our effective tax rate due to additional interest and depreciation deductions provided for in the CARES Act enacted on March 27, 2020 resulting in a reduction of income tax expense by approximately $26.0 million in the first half of 2020.”

Transdigm Group Inc.

3728 — Aircraft Parts & Auxiliary Equipment

“The most significant impact of the CARES Act for the Company is an increase of the IRC 163(j) Interest Disallowance Limitations from 30% to 50% of adjusted taxable income which will allow the Company to deduct additional interest for fiscal years 2020 and 2021. The Company continues to assess the impact of the CARES Act and ongoing government guidance related to COVID-19 that may be issued.”

MGM Resorts International

7011 — Hotels & Motels

“Based on a preliminary analysis of the CARES Act, the benefits we expect to recognize include: refund of federal income taxes due to a five-year carryback of net operating loss incurred in 2020 when our 2020 tax return is filed, which we estimate will result in a $225 million to $250 million refund that we expect to receive in the second or third quarter of 2021; relaxation of interest expense deduction limitation for income tax purposes, which is included in the estimate above.”

Willis Towers Watson PLC

6411 — Insurance Agents, Brokers & Service

“During the three months ended June 30, 2020, the Company elected to use the section 163(j) 50 percent business interest limitation for tax years 2019 and 2020. Utilizing this temporary provision, the Company accelerated a cash tax benefit in 2020 of approximately $40 million for tax years 2019 and 2020.”

*Complete List of 12 Companies Reporting 50% Interest Limitation Is Available at //s3.amazonaws.com/pdfs.taxnotes.com/2020/2020-32170_Sullivan_Tables_CARES_Act_2Q_SP_500.docx.

Table 4. Ten* Notable Reports of Payroll Tax Deferral in Second Quarter 10-Q Filings to the SEC by S&P 500 Companies

Company

Sic Industry

Text From 10-Q Report

International Business Machines Corp.

3570 — Computer & Office Equipment

“Payroll tax and value-added tax payment deferrals and exemptions of approximately $550 million due to tax relief provided under the U.S. CARES Act and other non-U.S. government assistance programs related to COVID-19.” [first six months]

Raytheon Technologies Corp.

3724 — Aircraft Engines & Engine Parts

“CARES Act, along with earlier issued IRS guidance, provides for a net deferral of payroll tax payments. As a result, we have deferred cash outflows of approximately $200 million during the six months ended June 30, 2020, and expect a full year 2020 cash flows benefit of approximately $450 million. This will have the effect of increasing cash outflows for payroll taxes during 2021 and 2022.”

Lockheed Martin Corp.

3760 — Guided Missiles

“The deferral of $160 million for the employer portion of payroll taxes to 2021 and 2022 pursuant to the CARES Act.”

United Parcel Service Inc.

4210 — Trucking & Courier Services

“Favorable changes in our working capital, largely driven by changes in incentive compensation plan payouts and other compensation-related items. These included deferral of approximately $370 million of employer payroll taxes [for the first six months].” “We anticipate that the various provisions of the CARES Act will provide a temporary cash flow benefit in the current year of approximately $1.0 billion.”

American Airlines Group Inc.

4512 — Air Transportation, Scheduled

“American is permitted to, and will, defer payment of the employer portion of Social Security taxes through the end of 2020 (with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022). This deferral is expected to provide approximately $300 million in additional liquidity.”

Delta Air Lines Inc.

4512 — Air Transportation, Scheduled

“The CARES Act also provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. This is expected to provide us with approximately $200 million of additional liquidity during the current year.”

Kroger Co.

5411 — Retail — Grocery Stores

“During the first quarter of 2020, we deferred the employer portion of social security tax of $157 million which is included in ‘Other long-term liabilities’ in our Consolidated Balance Sheets. We expect to defer a total of approximately $600 million of payments related to the employer’s portion of social security tax in 2020.”

CVS Health Corp.

5912 — Drug Stores and Proprietary Stores

“The CARES Act also allows for the deferral of Social Security taxes effective March 27, 2020. The Company has elected to defer its Social Security tax payments in accordance with this provision and will remit the associated payments in two equal installments on or about December 31, 2021 and December 31, 2022, as required under the CARES Act. The Company deferred $225 million of its Social Security tax payments during the three months ended June 30, 2020.”

Progressive Corp. /OH/

6331 — Fire, Marine & Casualty Insurance

“We do not expect the CARES Act to materially impact us. We are, however, electing to defer the payment of our portion of Social Security payroll taxes, as permitted under the CARES Act. We estimate that we will defer about $130 million of payments in 2020.” “As of June 30, 2020, we deferred approximately $50 million of payments related to our portion of Social Security payroll taxes.”

HCA Healthcare Inc.

8062 — General Medical & Surgical

“At June 30, 2020, the Company had deferred $220 million of payroll taxes recorded under the caption ‘accrued salaries’ in our condensed consolidated balance sheet.”

*Complete List of 74 Companies Reporting Payroll Tax Deferral Is Available at //s3.amazonaws.com/pdfs.taxnotes.com/2020/2020-32170_Sullivan_Tables_CARES_Act_2Q_SP_500.docx.

Table 5. Ten* Notable Reports of Accelerated AMT Carryforward in Second Quarter 10-Q Filings to the SEC by S&P 500 Companies

Company

SIC Industry

Relevant Text From 10-Q Report

Freeport-McMoran Inc.

1000 — Metal Mining

“Some of these measures will provide FCX with the opportunity to accelerate the timing of cash collections, primarily those associated with the U.S. alternative minimum tax credit refunds. FCX collected $221 million of U.S. alternative minimum tax credit refunds in July 2020, and expects to collect the outstanding balance ($47 million) within the next 12 months.”

Occidental Petroleum Corp./DE/

1311 — Crude Petroleum & Natural Gas

“As of the date of this report, Occidental received approximately $170 million of cash refunds as a result of the aforementioned AMT credit and NOL carryback provisions and anticipates an additional $25 million cash refund by the end of the year.”

DiamondBack Energy Inc.

1311 — Crude Petroleum & Natural Gas

“As a result of the refund associated with such carryback as well as the accelerated refund available for minimum tax credits, the Company’s current federal taxes receivable total approximately $101 million as of March 31, 2020 and June 30, 2020.”

EOG Resources Inc.

1311 — Crude Petroleum & Natural Gas

“As a result of the CARES Act, EOG has reclassified these credits from a non-current receivable in Other Assets to a current receivable in Income Taxes Receivable on the Condensed Consolidated Balance Sheet at June 30, 2020. The $150 million of additional refundable AMT credits were received in July 2020.”

Marathon Oil Corp.

1311 — Crude Petroleum & Natural Gas

“Subsequent to June 30, 2020, we received an $89 million cash refund related to these alternative minimum tax credits and interest.”

American Airlines Group Inc.

4512 — Air Transportation, Scheduled

 

“At December 31, 2019, we had an Alternative Minimum Tax (AMT) credit carryforward of approximately $170 million available for federal income tax purposes, which is presently expected to be fully refunded in 2020 as a result of the CARES Act enacted in March of 2020.”

DTE Energy Co.

4911 — Electric Services

“The receivable is comprised of $153 million for the immediate refund of the 2018 remaining AMT credit balance and $67 million as a result of carrying back the 2018 net operating loss to 2013.”

Duke Energy Corp.

4931 — Electric & Other Services Combined

“The total income tax receivable related to AMT credit carryforwards is approximately $572 million as of June 30, 2020.” “The other provisions within the CARES Act do not materially impact Duke Energy’s income tax accounting.”

Sempra Energy

4932 — Gas & Other Services Combined

Sempra Energy has filed a refund claim for its corporate AMT credits and expects to receive approximately $56 million in 2020 rather than in installments through 2021.”

Hartford Financial Services Group Inc.

6331 — Fire, Marine & Casualty Insurance

“As of June 30, 2020 the Company had remaining AMT credit carryforwards of $410 [million] which are reflected as a current income tax receivable within other assets in the accompanying Condensed Consolidated Balance Sheets. In July of 2020, the Company received a $206 [million] refund of AMT credits including $1 [million] of interest, with the remaining balance of $205 [million] to be utilized against federal estimated tax payments due in July and September.”

*Complete List of 21 Companies Reporting Accelerated AMT Carryforwards Is Available at //s3.amazonaws.com/pdfs.taxnotes.com/2020/2020-32170_Sullivan_Tables_CARES_Act_2Q_SP_500.docx.

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