Income tax opportunities to increase liquidity
Take your liquidity to the next level
You’ve likely looked in every nook and cranny of your budget to increase liquidity – but have you looked at your income taxes? It might not be the first place you consider, but you might be surprised to find all the places cash can hide in your income taxes, both in the past and moving forward.
Maybe you have pored over your taxes and already reached for the low-hanging fruit, implementing simple strategies. Did you know you could put even more money back in your organization if you dig a little deeper? Here are some unexpected ways to help elevate your bottom line.
Increase liquidity now by looking back at your past
Strategies to increase liquidity moving forward: what to do right now
Increase liquidity now by looking back at your past
Increase liquidity now by looking back at your past
Right now cash is king, and changes in tax laws could help you find even more. Looking back in past tax years is a great way to reach for cash and increase liquidity now. For example, if you carry back $100 in losses (with the current rate at 21%) to 2017 or earlier (when the tax rate was 35%), your $21 is now $35.
Here are some of those simple strategies:
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided a new five-year carryback period for 2018 and 2019 NOLs, as well as a new two-year carryback for certain fiscal year taxpayers with tax years beginning in 2017 and ending in 2018. The rules allow you to maximize your benefit by carrying back to years when the tax rate was 35% (instead of the current 21% rate).
The CARES Act accelerated the refund of the remaining AMT credit to the 2019 tax year, with an election to claim the refund in the 2018 tax year.
In the 2017 tax law, Congress intended to give taxpayers benefits for building depreciation deductions, but an error precluded taxpayers from being able to take advantage of the benefit. The CARES Act retroactively fixed that error and now allows taxpayers to reclassify their building improvements from 2018 and 2019, which means they can capture significant amounts of depreciation deductions. This method also can be combined with cost segregation to generate additional tax advantages and potentially permanent tax rate changes.
Here are even more options, independent of federal tax, which can put money in your budget:
Because of the Wayfair decision and other factors, you could be materially overpaying sales and use tax. To comply with state laws enacted after Wayfair, vendors may be charging you sales tax on exempt items. Or you may be overpaying use tax in addition to the vendor-charged sales tax. Our sales and use tax specialists can review your sales and use tax information to assist you in determining if you are paying too much and if you can recover any overpayment.
If you’re making or selling things, chances are you’re importing – and you’re paying customs and duties taxes. But with the current trade wars, you could be paying more than you should. Our team can help you decide if there is a lingering opportunity to find money from refunds of tariffs and transactional taxes or to reduce or eliminate the taxes altogether. We regularly find $2 million-$3 million per year for our clients across a wide variety of industries.
Property tax is the only tax that is based on an opinion (of value), and it includes many exemptions, special valuation methods, and taxability and situs rules. Our team can help you review these taxes to see if there’s a way to make a significant difference to your tax liability and bottom line.
Strategies to increase liquidity moving forward: what to do right now
Strategies to increase liquidity moving forward: what to do right now
If you’ve looked at past income taxes and maximized your liquidity there, you can dig even deeper still. There are a variety of strategies you can use right now to help you maintain and increase liquidity moving forward.
Our tax team can help you find the right strategies for your business. We have extensive experience creating custom plans and can help you with just about anything – from strategic planning to direct execution.
If you’ve made any large capital expenditure related to a building facility, cost segregation can help. Nonbuilding property related to those expenditures can be depreciated much more quickly for federal tax purposes than for building property. Cost segregation identifies and segregates nonbuilding property so the taxpayer can take advantage of accelerated depreciation and the related tax advantages. This method also can be combined with QIP to generate additional tax advantages and potentially permanent tax rate changes.
Reviewing current accounting methods could find opportunities to defer revenue recognition and accelerate the timing of deductions, thus improving cash flow. The review can be even more significant when it results in creating a loss, which can be carried back to previous tax years with higher income tax rates.
The CARES Act increased corporations’ deduction limit imposed by the Tax Cuts and Jobs Act (TCJA) from 30% of adjusted taxable income (ATI) to 50% of adjusted taxable income for the 2019 and 2020 tax years. Companies also can use their 2019 adjusted taxable income on their 2020 returns. Partnerships have a 30% ATI limit for 2019 and are allowed a 50% limit in 2020. Fifty percent of a partner’s 2019 share of disallowed excess business interest expense passed through by a partnership will be treated as business interest that is not subject to any Section 163(j) limitation paid or accrued by the partner in 2020.
Manufacturers and producers might want to review their inventory valuation methods. Changes in the inventory rules created an opportunity to reduce the amount of costs required to be capitalized for tax purposes.
If you sustained losses in a federally declared disaster area in 2020, you may elect to claim the losses on your 2019 tax returns, which would allow you to reduce your taxes owed and improve cash flows. Make sure to evaluate the losses you sustained due to COVID-19, as you might benefit from making an election to use those losses in the prior year.
The R&E tax credit provides a return on investment for spend on qualifying research activities. These activities must be related to new process and product development undertaken with technical challenges, which includes a process of experimentation to overcome such challenges. In the current economic environment, an opportunity exists to maximize credits based on current taxpayer-favorable case law and an IRS safe harbor directive.
Multinational companies might be able to find opportunities for cash flow in transfer pricing analysis, which assesses transactions between you and your manufacturers and distributors.
You increase liquidity the most when you take a top-to-bottom approach
These strategies give you a laundry list of options, but they’re not one-size-fits-all. Every industry has particular strategies that make the most sense, and each business needs to decide how to allocate time and resources so you can take a deeper dive.
Don't let a lack of resources keep you from considering new strategies
Now is not the time to discount any strategy that could increase your liquidity or cash flow. Contact us today and see how we can help you implement the best income tax optimization strategies for your business.