Corporations and their advisers are eyeing overlooked IRS guidance and elements of the tax code to boost their cash flow during the economic downturn.
The coronavirus pandemic has left companies scrambling for cash in an effort to stay afloat and avoid mass layoffs, and they are increasingly considering shifting around deductions and income to get that money—in the form of refunds from the IRS. This effort to boost liquidity involves leveraging the latest stimulus law (Public Law 116-136), known as the CARES Act, in tandem with tax code quirks, according to tax professionals at major law and accounting firms.
“Now’s the time when you could go back and, in addition to taking advantage of things in the CARES Act, you may be able to supplement that with other things that you haven’t looked at closely,” said Ellen McElroy, a former IRS official and now a partner at Eversheds Sutherland LLP in Washington, D.C., adding that she’s discussing a wide range of strategies with clients.
The law corrected a major 2017 tax law error that barred companies’ interior renovations from its coveted full expensing provision and accelerated corporation’s alternative minimum tax credits. It also allows companies to carry losses back to five years earlier. That means corporations can add to their 2020 loss at large and then use it as a tax break in years when the corporate rate stood at 35%, to generate a refund early next year.
But if the need for cash is more immediate, they might be better served by shifting more deductions into the 2019 year and getting a refund for those write-offs sooner.
“There’s always an ability to play or plan with accounting methods when you need to reduce your cash tax,” said Christine Turgeon, a former Treasury official, now a partner at PwC, noting her clients’ urgency in seeking refunds by carrying back losses.
Tax professionals are encouraging clients to look beyond the stimulus law at existing tax breaks.
For example, companies can conduct studies of construction projects to carve out costs for deductions. Some prepaid future expenses can be deducted in the current year, depending on how long the good or service, such as insurance coverage, is provided after the payment.
Software development costs may also be deductible under IRS guidance. Companies can change their methods of accounting for depreciation—generating greater deductions for the drop in value of property over time—and defer the taxation of certain advance payments under part of the 2017 tax law. Debts that can’t be collected can serve as another source of write-offs.
“Writing down partially worthless bad debt is another option. And then we’re also looking at things like wholly worthless bad debt and debt restructuring to generate deductions,” said former Treasury attorney Ellen Martin, now a partner at Grant Thornton LLP in Washington. “There’s just a whole host of things across a lot of different areas of tax that can substantially increase liquidity.”
Two sets of IRS rules—(T.D. 9874) and (REG-106808-19)—released last fall may give companies a separate chance to go back and take advantage of full expensing of their property purchases, such as equipment, vehicles, and machinery.
Businesses are still awaiting IRS guidance on how to take advantage of the rule changes easily, but checking whether it yields new opportunities for write-offs is “something else I think would really be worthwhile,” said Andrea Mouw, a partner at Eide Bailly LLP in Minneapolis, adding that not all of her clients have considered this since the September rule release.
Tax advisers are also suggesting their clients claim a credit for research and development under tax code Section 41. It can apply to software updates, distilleries producing hand sanitizer, insurance companies developing new policies, and a slew of others in the food and beverage industry, said former IRS Commissioner Mark Everson.
“Think about what is already embedded in the tax code that you haven’t taken advantage of,” said Everson, now at Alliantgroup LLP “If you look at this one provision, it’s applicable to small and large businesses alike.”
Myron Moser, president and CEO of Minnesota-based Hartfiel Automation, said his company recouped about 10% of 2018 profits in 2019 by filing an amendment to claim the perk.
“When it comes to the tax side, this is also, I think, a potential stimulus that a lot of businesses don’t know about or don’t think they qualify for,” Moser said. “There’s never been more of a time of need right now to figure that out.”
Companies located in areas designated as empowerment zones can get tax credits for employees who live in the zones. The credits can amount to $3,000 per worker each year.
The empowerment zones program expired at the end of 2017, but lawmakers reinstated it at the end of last year for 2018 through 2020. Businesses can take advantage of the credit retroactively.
Employers in these areas could stand to benefit from checking the addresses of their workers if they haven’t already. While deductions reduce the amount of income subject to tax, credits are more valuable, as they reduce tax liability dollar-for-dollar.
“People are focusing a lot on the CARES Act and how to get refunds from that, but I think this empowerment zone credit is almost like a freebie,” said Lisa Haffer, an accountant and partner at BDO in Cincinnati, adding that this is something her firm has been advising businesses to do even before the pandemic hit.
Unlike many of the strategies to squeeze more money out of the tax code and existing guidance, the credits are fairly simple and easy for businesses to take advantage of on their own, Haffer said.
If the employer qualifies, she added, “Why not do it?”