Quick Refund Claims: Potential Tax Relief for Portfolio Companies

More About | Private Equity | Tax | COVID-19

Just last week, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, which provides a number of provisions designed to support businesses and individuals impacted by the COVID-19 pandemic. While many provisions included in the CARES Act could impact private equity groups, family offices and portfolio companies, certain aspects of the bill could provide sponsor-backed C-corporations access to much needed cash near-term while other tax highlights could result in a realized benefit once taxpayers file 2019 and 2020 returns.

The following notable items are taxpayer-favorable and could potentially deliver immediate cash relief for portfolio companies:

  1. Expanded business interest expense deductions for 2019 and 2020: The CARES Act relaxes limitations on the deductibility of interest expense by increasing the limitation from 30 percent of adjusted taxable income (ATI) to 50 percent for taxable years beginning in 2019 and 2020 for corporations. Taxpayers may also elect to use the ATI from 2019 for purposes of calculating the limit for 2020 tax returns.
  2. Correction of qualified improvement property (QIP) depreciation: The CARES Act provides retroactive amendments to the expensing provision known as the “retail glitch.” This provision provides a technical correction to the Tax Cuts and Jobs Acts (TCJA) signed into law in December 2017. The TCJA intended to provide immediate expensing for certain improvements to real property, known as QIP, through bonus depreciation. The intention was to allow for a 15-year recovery period (as opposed to the current 39 years) to the extent not immediately expensed. Due to an acknowledged drafting error in the TCJA, this did not occur. The CARES Act corrects this error and retroactively applies this treatment back to the 2018 tax year. In order to qualify for this treatment, the improvements must meet a few key requirements: the improvements must be to an existing building, must be to the interior of the building and must not be related to an enlargement of the building.
  3. Net operating loss (NOL) carryback rules: The original tax reform bill eliminated the ability to carry back corporate NOLs to prior periods. Under the CARES Act, NOLs generated in 2018 to 2020 can now be carried back five years, including years where the corporate tax rate was still 35 percent. This provision, coupled with accounting method changes and other existing tax planning ideas, provides significant cash tax refund opportunities.

The CARES Act has the potential to improve the near-term cash flow of many corporate taxpayers. Corporations that have estimated tax payments on deposit for a tax year are generally allowed to file a request for a Quick Refund Claim on Form 4466 after the end of the tax year but prior to the original due date of the corporate tax return as long as certain requirements are met. The deadline to file a Quick Refund Claim on Form 4466 remains April 15, 2020, for most calendar year corporations despite the recent IRS announcement that individuals and businesses may defer both federal income tax payments and filings to July 15, 2020. Portfolio companies and investors should act quickly to determine the impact of the CARES Act on corporate income tax liabilities and consider the ability to file a Quick Refund Claim by April 15, 2020. Additionally, corporations should consider working with their tax advisor to model scenarios under the expanded NOL carryback provisions to maximize the value and timing of cash flow from tax refunds.

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