Tax Relief Strategies for 2020
The tax function plays a critical role in navigating recovery and positioning businesses to emerge from this crisis. An effective tax strategy can preserve liquidity, lower costs, and work in tandem with overall business strategy.
Beware of the IRS stance on the non-deductibility of expenditures using PPP funds
Tell your members of Congress to support small businesses by quickly passing S. 3612 and H.R. 6821, the Small Business Expense Protection Acts of 2020, or H.R.6754, the Protecting the Paycheck Protection Program Act. This legislation will ensure that the receipt and forgiveness of coronavirus assistance through the PPP does not result in an unexpected and burdensome tax cost for organizations that complied with the terms of the PPP. Passing this legislation as soon as possible will allow businesses that received PPP funds more certainty as they focus on year-end business planning that is especially important in these challenging economic times.
Some Strategies to Generate Immediate Cash Flow
Access to cash is always critical. Understanding possible tax credits and incentives or methods to defer tax liability can help a company with their cash position. Below are several tax ideas to consider:
- Debt and Losses Optimization
- File net operating loss (NOL) carryback and alternative minimum tax (AMT) credit refund claims to reduce tax payments and obtain immediate refunds for taxes paid in prior years. The NOL carryback was reinstated with the CARES Act and it can be a major cash creator if you experience a loss this year.
- File Form 1138 to relieve 2019 tax payments due with the 2019 returns for corporations expecting a 2020 loss that could be carried back to the earlier year.
- Analyze the tax impact of income resulting from the cancellation of debt during a debt restructuring for possible exceptions due to insolvency or bankruptcy. Alternatively, if the income is taxable, consider possible strategies to generate capital gain vs ordinary income during a debt workout transaction.
- Consider claiming losses related to worthless, damaged or abandoned property to generate ordinary losses under for specific assets, for insolvent investments in subsidiaries that are at least 80% owned (under Section 165(g)(3)) and for certain insolvent investment entities taxed as partnerships.
- Certain losses attributable to COVID-19 may be eligible for an election underSection 165(i) to be claimed on the preceding tax year’s return, possibly reducing income and tax in the earlier year, or creating an NOL that provides an additional year of carryback potential in which to receive a refund.
- Consider filing accounting method changes to accelerate deductions and defer income recognition with the goal of increasing a loss in 2020 for expanded loss carryback rules under the CARES Act. Common method changes include deferral of advance payments, accelerating the deduction of certain prepaid expenses to the year of payment under the 12-month rule, deducting software development costs in the year incurred and applying the recurring item exception for property taxes, state taxes, rebates, allowances and payroll taxes.
- International Tax Savings
- Review U.S. customs and duties for relaxed tariffs on some products and watch for extensions to pay duties, taxes and fees.
- Mobilize cash from foreign operations while considering repatriation costs (e.g., previously taxed earnings and profits and basis amounts, withholding taxes, local reserve restrictions, Sections 956 and 245A).
- Making the Most of Legislation
- 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. Taxable income for a year can be fully offset due to a temporary suspension of the 80% income limitation.
- Consider the Employee Retention Credit, which allows for a refundable payroll tax credit for eligible employers harmed by COVID-19. The credit is equal to 50% of up to $10,000 in qualified wages per employee (i.e., a total of $5,000 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.
Let Us Help
Our professionals understand these tax nuances. If you have questions, please contact your designated Bronswick Benjamin team member or our office at (312) 629-8300.