The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), when combined with existing tax accounting method changes, elections and deductions, provides taxpayers an opportunity to generate significant cash savings and refunds. A few of the provisions which may be helpful in generating current cash include:
Net Operating Losses (NOLs)
- NOLs generated in 2018 – 2020 may be carried back up to five tax years or carried forward to offset 100 percent of taxable income.
- IRS notices provided following the passage of the CARES Act extend the period for filing Form 1139 (corporate refund application) or Form 1045 (non- corporate refund application) through June 30, 2020. These refund applications can be temporarily faxed to the IRS and may provide quicker cash refunds than traditional amended return carryback procedures.
Note that these provisions are available for both corporate and individual taxpayers. Corporate taxpayers can obtain permanent tax savings by carrying back NOLs generated in 21 percent tax rate years (post-2017) to prior 35 percent tax rate years (pre-2018). Similarly, individuals may benefit from the rate arbitrage between current NOL years and prior carryback years.
Minimum Tax Credits
- AMT credits previously recoverable as late as 2021 can now be recovered in full with a 2018 or 2019 tax return. This accelerates the refund of AMT credits generated prior to the December 2017 repeal of corporate AMT.
Taxpayers seeking a refund of remaining AMT credits may do so on a timely filed or amended tax return, or by filing a request for tentative refund with the IRS.
Business Interest Expense
- Corporate taxpayers may deduct business interest expense in an amount up to 50 percent of adjusted taxable income (ATI) for tax years beginning in 2019 and 2020 (prior limit was 30 percent).
- Partnerships are eligible beginning in 2020 (with special considerations for 2019)
Taxpayers may elect to use 2019 ATI when computing their deductible 2020 business interest. These provisions increase the eligible interest deduction, potentially reducing current cash taxes.
Qualified Improvement Property (QIP)
- QIP placed in service after Dec. 31, 2017 is assigned a 15-year depreciable recovery period and is eligible for bonus depreciation. Previously, QIP placed in service after 2017 was assigned a 39-year depreciable recovery period and was ineligible for bonus depreciation.
This is especially beneficial for companies in the retail, hospitality, banking and real estate industries or companies who have significant leasehold improvement property. Impacted taxpayers may file Form 3115 or amend their 2018 tax return to reflect the change in treatment of QIP.
State Tax Considerations
States are just beginning to assess their conformity with the federal CARES Act. State issues that taxpayers may want to consider include:
- Domestic transfer pricing
- State-specific filing and apportionment elections
- Credits and incentives for hiring, research and development and capital expenditures
- Sales and use tax refund reviews
- Personal property tax analysis and streamlining
- Real property tax valuation assessments
Accounting Method Changes
Cash tax savings can be generated by either reducing current taxable income or by carrying back NOLs to offset taxable income and refund prior tax payments. An important tool in generating deductions is the use of tax accounting method changes. While taxpayers should carefully consider all possible favorable method changes, several may be particularly applicable in the current economic environment:
- Current write-off of specifically identifiable and uncollectible business debts
- Excluding revenue associated with transactions currently disputed by customers
- Write-off of inventory goods with a fair market value lower than cost / carrying value
Eligible taxpayers with $26 million or less in average gross receipts may also consider using the cash method of accounting, as well as exceptions allowing for a current deduction of inventory and from capitalizing additional costs to ending inventory under Uniform Capitalization (UNICAP, IRC §263A).
The Importance of Modeling
The CARES Act presents taxpayers with opportunities for immediate cash tax refunds, especially when coupled with known method changes and other tax planning items. However, the interaction of the CARES Act with the tax reform provisions of the 2017 Tax Cuts and Jobs Act introduces substantial complexities. Depending on a taxpayer’s specific facts, it may be better to amend prior returns, record a deduction on a 2019 return, reduce estimated tax payments due in 2020, or some combination. Not all deductions are created equal as a 2019 deduction may generate a 21 percent tax rate benefit while the same deduction deferred until 2020 may create an NOL which can be carried back for a 35 percent tax rate benefit. Bundling deductions into the same period may create or increase NOLs, which increase a company’s overall tax savings when carried back. Tax modeling based on specific facts is critical to determining the optimal period for capturing tax deductions.
As companies navigate these uncertain economic times, tax planning provides an opportunity to generate cash tax savings and refunds. Interactions between various provisions of the CARES Act and existing tax law can present potential pitfalls for the unwary and opportunities for the savvy.
We encourage you to work closely with your tax advisor to develop a strategy that balances your immediacy for cash with generating the highest possible refund. DHG Tax has the tools and expertise to help you quickly assess your opportunity for cash tax savings.