Find relief in tax strategies that generate cash flow

Sarah Fischer

During these challenging times, companies need access to cash to offset unforeseen costs, whether that’s personal protective equipment for on-site employees or technology to keep a remote workforce efficiently connected.

Tax strategies can help identify and execute cash flow opportunities and maintain the liquidity needed to navigate the uncertainty ahead. In the short term, business owners and their tax professionals should look for low-hanging fruit to generate benefits as quickly as possible.

While not exhaustive, here are some strategies to consider:

Debt and loss optimization.

File net operating loss (NOL) carryback and alternative minimum tax credit refund claims (2018, 2019) to reduce tax payments and obtain immediate refunds for taxes paid in prior years under the CARES Act expanded five-year carry back period.

Analyze the tax impact of income resulting from the cancellation of debt in the course of a debt restructuring for possible exceptions due to insolvency or bankruptcy.

Consider claiming losses related to worthless, damaged or abandoned property to generate ordinary losses for specific assets.

Decrease estimated tax payments based on lower 2020 income projections if overpayments are anticipated.

Understand the compliance requirements and tax consequences of federal funding.

If your business secured such emergency relief funding as a Paycheck Protection Program loan, ensure these benefits don’t result in unexpected penalties and costs. Learn about the effects of forgiveness for forgivable loans and understand potential tax ramifications, such as non-deductible expenses paid with a PPP loan.

Uncover missed opportunities for tax savings.

Look for potential projects that could require an upfront investment of time and capital, but have the potential to uncover significant savings opportunities.

R&D tax credit studies: The money companies spend on technology and innovation can offset payroll and income taxes through R&D tax credits. The credits benefit a broad range of companies across industries, yet many businesses leave money on the table.

Property tax assessment appeals: In the wake of the COVID-19 pandemic, some jurisdictions re-evaluate property tax processes via disaster relief and conduct assessments at an earlier date. Property tax appeals can generate cash savings by challenging assessed values and reducing liabilities.

Cost segregation studies: Cost segregation studies can help owners of commercial or residential buildings increase cash flow by accelerating federal tax depreciation of construction-related assets. Depending on the type of building and cost, the increased cash-flow and time-value benefits are often significant.

Evaluate cash versus accrual accounting methods and make changes, if necessary, to defer income tax and increase cash flow.

Make the most of legislation.

Understand how the CARES Act provides relief to employers.

Defer the employer’s share of Social Security taxes. Deferment is allowed only until the earlier of Dec. 31 or the date the employer’s PPP loan is forgiven. Half the deferred deposit must be repaid by Dec. 31, 2021, and the other half must be repaid by Dec. 31, 2022. The deposit deferral is not subject to interest or penalties if the deferred amounts are timely repaid.

Secure a quick tax refund in 90 days by using Form 1139 to file for a five-year NOL carryback for losses generated in 2018 through 2020.

Consider the employee retention credit provision allowing for a refundable payroll tax credit for eligible employers harmed by COVID-19 equal to 50 percent up to $10,000 in qualified wages per employee. Employers generally are not eligible for the employee retention credit if any member of their controlled or affiliated service group obtained a PPP loan.

Consider amending a prior year tax return to take an accelerated depreciation expense deduction on qualified improvement property. QIP placed in service after 2017 had defaulted to a 39-year recovery period and was ineligible for bonus depreciation. A technical correction was included in the CARES Act to make this property eligible for a 15-year recovery period and bonus depreciation.

 Although companies that have survived up to this point have overcome immediate safety and cash flow problems, they still face uncertainty. No one can predict how long the downturn will last, whether the world will revert into crisis mode or the path towards long-term recovery has begun.

Businesses that effectively use tax strategies to focus on seizing the strategic opportunities available to them will make the most of tough conditions and emerge as market leaders.