- Many organizations are struggling to generate or retain cash as a result of the coronavirus pandemic.
- The federal government passed legislation to support organizations during these challenging times.
- Changes to the tax code may provide opportunities for your organization to increase cash flow.
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In the world of business, it’s often said cash is king. Never is this statement truer than when the economic outlook can be described as uncertain at best. With this in mind, the federal government enacted new laws and lending programs to put cash in the hands of American businesses, in response to the global outbreak of the COVID-19 virus. Here are 10 opportunities for businesses and their owners to utilize tax code changes to quickly help generate or retain cash during these uncertain times.
1. Net operating losses
The 2017 Tax Cuts and Jobs Act (TCJA) limited the use of net operating losses (NOLs) by both removing the ability for most taxpayers to carry NOLs back to generate tax refunds and limiting the use of NOLs to offset only 80% of taxable income. The recently enacted CARES Act temporarily removes both of these limitations, and allows you to carry back 2018 through 2020 NOLs five years to generate cash refunds.
In addition to filing amended returns to claim the NOL carrybacks, the IRS gave taxpayers a six-month extension to file an application for tentative refund for their 2018 tax year. The IRS must process these expedited refund requests within 90 days.
A fiscal year taxpayer (usually a C corporation) with an NOL for its year beginning in 2017 and ending in 2018 is allowed a two-year carryback, due to the changes in the CARES Act. You must act by July 27, 2020, to use the application for a tentative refund or to change your NOL elections for that fiscal year.
2. Corporate minimum tax credit refunds
The TCJA repealed the corporate alternative minimum tax and allowed corporations with minimum tax credits to claim a refund for these credits during their 2018 through 2021 tax years. The CARES Act accelerates the refund of these credits to a corporation’s 2018 or 2019 tax years.
3. Suspension of excess business losses
Beginning in 2018, the TCJA created a new $250,000 ($500,000 married filing joint) limitation on the deductibility of a taxpayer’s business losses in any given year. The CARES Act has retroactively suspended this limitation, meaning you can now generate large NOLs in 2018, 2019, and 2020, and those losses can be carried back five years to generate cash refunds.
4. Bonus depreciation for qualified improvement property
The TCJA increased bonus depreciation to 100%, allowing you to fully expense most purchased equipment (new and used) in the year of acquisition. Interior improvements to commercial buildings (qualified improvement property, or QIP) were intended to be eligible for 100% bonus depreciation, but a drafting error, commonly known as the “Retail Glitch,” caused QIP to not be eligible for bonus depreciation.
The CARES Act corrects the Retail Glitch, making QIP eligible for 100% bonus depreciation. The correction is retroactive to 2018, allowing you to either file amended returns or accounting method changes to expense the full cost of such improvements.
Certain real property or farming businesses that elected out of the business interest expense limitation will not be able to claim bonus depreciation for QIP, but can cut the depreciable recovery period for QIP in half. Alternatively, the IRS is temporarily allowing these businesses to withdraw their election out of the interest expense limitation, making them eligible to claim bonus depreciation for QIP.
5. Employee retention credit
Businesses that experience a decrease in gross receipts of more than 50% (compared to the same quarter in 2019) or a full or partial suspension of operations because of governmental orders due to COVID-19 are eligible to claim a new employee retention credit. The credit is equal to 50% of the qualified wages the business pays to employees (up to $10,000 per employee) in 2020, beginning March 13. The credit is refundable against employment taxes and can be used to reduce required deposits, beginning with the second quarter.
Qualified wages for employers with more than 100 full-time employees include wages for employees unable to work as a result of a government-ordered suspension of operations. Employers of this size would also be eligible for the credit if they meet the decline in revenue test. Small employers need not demonstrate that employees were not able to work.
One caveat: businesses receiving a Small Business Interruption Loan under the Paycheck Protection Program are not eligible for the employee retention credit.
6. Employee Paid Leave Credits
The Families First Coronavirus Response Act created two new payroll tax credits for employers with fewer than 500 employees, providing employees with paid coronavirus-related leave.
- Paid Sick Leave Credit — provides up to $511 per day of paid leave, for up to 10 days ($5,110 total), for an employee unable to work because of a coronavirus quarantine or having symptoms and seeking a medical diagnosis. If the employee is unable to work because they are caring for someone with the virus or they are caring for a child because the child’s school or child care facility is closed, the credit is up to $200 per day for up to 10 days ($2,000 total).
- Child Care Leave Credit — provides up to $200 per day, for up to 10 weeks ($10,000 total), for an employee who is unable to work because of a need to care for a child whose school or child care facility is closed.
Both credits are refundable payroll tax credits and can be used to reduce required deposits, beginning with the second quarter. If your business does not have sufficient payroll taxes to fully utilize the credits, you can request an accelerated payment of the credit from the IRS. The credits apply to wages paid from April 1, 2020, through the end of the year for employees on leave.
7. Corporate quick refund
If a corporation’s fiscal year ended but the original due date has not passed, the corporation may file for a quick refund of overpaid estimated taxes. For example, a corporation with a March 31, 2020, year-end determines that it overpaid its estimated taxes. It may file Form 4466 before July 15, 2020, to request a refund of its estimated overpaid tax. This form accelerates the refund and is especially valuable if the corporation isn’t able to file its tax return by the original due date.
Entities reporting income using April and May fiscal year-ends may find this valuable, as they probably paid three quarterly estimates before the collapse of sales, throwing the business from what may have been a very profitable year to a net operating loss. Form 4466 may not be filed until after the year-end.
8. Coronavirus-related distributions from retirement funds
Taxpayers impacted by the coronavirus are eligible to take up to $100,000 in distributions from their retirement plans in 2020 penalty-free. While the distributions will generally still be taxable, the income is recognized over a three-year period. Taxpayers also have the opportunity to repay the amount to a retirement plan within three years of the distributions and have the distributions treated as tax-free rollovers.
9. Cash repatriation from foreign subsidiaries
If a U.S. company needs cash and has foreign operations with excess cash, it may be able to repatriate foreign earnings without incurring federal income tax, since the earnings in the foreign entity have likely already been subjected to U.S. taxation.
Prior to the TCJA, earnings of foreign corporations could be subjected to U.S. taxation as a deemed dividend (i.e., included in the U.S. taxpayer’s taxable income even though there was no actual dividend distribution) in limited fact patterns under the anti-deferral provisions of Subpart F. The TCJA expanded the anti-deferral provisions and subjected to U.S. taxation the cumulative undistributed and untaxed earnings of foreign subsidiary corporations. Therefore, since a significant amount of the undistributed foreign earnings of foreign corporations will have already been subjected to U.S. taxation, these earnings can be repatriated as an actual dividend and are not subject to U.S. taxation again. In addition, C corporations may be able to repatriate untaxed foreign earnings without U.S. taxation under the newly enacted 100% dividends received deduction.
Finally, as an alternative to declaring an actual dividend of the foreign corporation’s earnings, the U.S. C corporation parent may be able to borrow cash from the foreign corporation tax-free due to certain changes in the tax law made by the TCJA.
10. Deferral of employer Federal Insurance Contributions Act (FICA)
Retaining cash is also important. The employer share of 2020 FICA payroll taxes (i.e., 6.2% of employee gross pay, not in excess of the FICA wage basis for 2020 of $137,700) is not subject to the normal payroll tax deposit rules.
This tax is deferred, with 50% due December 31, 2021, and the balance due December 31, 2022. The provision also applies to 50% of a self-employed person’s self-employment tax. Quarterly estimates by the individual sole proprietor or partner of a partnership may be delayed until the end of 2021 and 2022. However, it is merely a deferral; plan on having sufficient funds at those dates to pay the tax liability.
How we can help
CLA is here to help you and your business navigate these uncertain waters. Please reach out to your CLA advisor for assistance finding strategies to generate cash to support your business during these difficult times.Contact Us