Amend your prior tax returns for expanded net operating loss provisions
The CARES Act allows for a five-year carryback of net operating losses arising in 2018, 2019, and 2020. It also allows net operating losses to offset 100% of income (expanded from 80% income offset). This means that you can carry losses back for 5 years potentially resulting in tax refunds, and thus, providing cash flow relatively quickly.
This is particularly attractive to businesses that own real estate that have not taken advantage of cost segregation for depreciation purposes. Cost segregation is a commonly used strategic tax planning tool that allows companies and individuals who have constructed, purchased, expanded, or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income tax.
For example, assume an individual pursues cost segregation and it is determined that a large depreciation deduction is available and results in a net operating loss for tax year 2019. This loss can be carried back for 5 years and applied to gains made in those years. This results in tax refunds—thus, providing cash flow in a time of need.
What to do now: Discuss all of your business activities with your tax professional over the last few years and see if you qualify for tax refunds.
Amend your tax returns for qualified improvement property
Qualified improvement property has been corrected under the CARES ACT to be identified as 15-year property. This means it is eligible for 100% bonus depreciation. This change is effective for property acquired and placed into service after Sept. 9, 2017. This means you may be eligible for tax refunds where the depreciation was missed before.
What to do now: Contact your tax professional and review your tax returns for the last 3 years to see if you qualify.
Employer credits for retention of employees
There is a refundable payroll tax credit for 50% of wages paid if your operations have been suspended or you have had more than a 50% reduction in quarterly receipts. If you have fewer than 100 employees, you calculate the credit based on all your employees’ wages.
You may realize a payroll tax refund and the funds can be utilized now.
What to do now: Contact your payroll provider or tax professional to calculate the credit and the impact on your business and cash flow.
Delay of employer payroll taxes
The social security taxes that employers pay and the self-employment tax paid by self-employed individuals due between March 27, 2020 to Dec. 31, 2020 are delayed. These amounts can now be paid over 2 years.
If you have fewer than 500 employees or are self-employed, you are eligible to apply for a business loan of up to $10 million. Interest rates max out at 4% and some of the loan amounts may be forgiven if used within 8 weeks for the following costs: payroll (including health care and independent contractors), mortgage or rent, and utility payments.
There are two loans, expanded by the CARES Act:
Paycheck Protection Program. Loans can be up to 2.5x the borrowers average monthly payroll costs of the previous year. The loan amount may be forgiven if used within 8 weeks for the following costs: payroll (including health care), mortgage or rent and utility payments. If done correctly, your entire loan amount may be transferred into a grant. The Payroll Protection loans are backed by the SBA and available from private lenders.
Economic Injury Disaster Loans (EIDLs). The expanded EIDL offers emergency cash advance and smaller loans can be approved without a personal guarantee. These loans are offered through the SBA.
What you may need to qualify: Your tax professional can help you with the financial statements and tax returns that will be needed to qualify for some loans. Your tax professional can also help you to adjust your bookkeeping for the loan money and expenses paid which will help you create the record that will be needed for loan forgiveness programs.
About Steve Moskowitz
Before becoming a tax attorney, Steve Moskowitz was a practicing CPA in corporate America and also worked for a “Big 8” now “Big-4” CPA firm. He has also taught tax, law and accounting in law school, graduate school and university. Steve now heads the tax law firm of Moskowitz LLP in the San Francisco financial district.
For more info on the CARES Act and how it impacts small businesses and individuals, check out this blog post.