Looking back at your taxes just might be the thing to move your business forward.
Your company has experienced the unexpected and now you’re wondering how to recover. Looking back at your taxes could be the answer. There are a variety of tax optimization strategies to use to look back at prior year taxes and potentially free up the cash your business needs now. Here are just a few to consider.
1. Accelerate your deduction through accounting method change
Find opportunities to defer revenue recognition and accelerate the timing of deductions by reviewing your current accounting methods. 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. You also can use an accounting method change to take advantage of the qualified improvement property (QIP) fix, reclassifying assets you previously placed in service to capture additional depreciation, then reporting that adjustment as a current-year deduction. While this change can be retroactive, it’s also available for assets you place into service in the current year and going forward. Plus, making changes this way (as opposed to amending your tax return) can save you time and administration costs.
2. Reap the benefits of a fixed asset review
You also can review the tax lives and methods of your historical fixed asset additions more generally, looking for more optimal classifications to accelerate deductions and potentially find cash in your business. The right consultant will help you understand the potential opportunity before conducting a full review. Simply provide basic records for evaluation and get a cost-benefit summary to see how much you might be able to save. In addition, this review can enable quick recovery of any recent fixed-asset investments using strategies that comply with complex tax rules. Not only can you uncover opportunities to accelerate tax deductions, but you also could increase cash flow and lower your organization’s cost of capital.
3. Go another round with QIP
In the Tax Cuts and Jobs Act of 2017 (TCJA), Congress meant to give taxpayers the opportunity to depreciate their building improvement property on a more accelerated basis and write off all expenses related to property improvements immediately. However, an error in the act wiped out that benefit altogether. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes a technical correction of the depreciation of QIP error.
If your business put QIP into service in 2018 or 2019, you can look back and change the classification, capture the deduction, and report it in a variety of ways (including amending your return or using an accounting method change). This change can give you the opportunity to reclassify your assets to create liquidity and get cash. This helpful article on the QIP fix can get you started.
Of course, each of these methods comes with its own set of compliance considerations. You’ll want to understand the tax implications and evaluate the impact that added depreciation deductions will have on your company’s (and/or your owner’s) taxable income. You might be able to use the additional deductions in the current year or carry those deductions forward.