One of the questions we are getting from clients is “If my business has had some recent losses, but we also think we may be eligible for the research and development credit, how does the CARES allow us to maximize the cash tax refunds?”
How can the CARES Act help?
The recent CARES Act that permits a 5-year carryback is an effective tool that may allow you to carry your recent losses back against taxable income that was taxed at higher tax rates. Deductions are more valuable when the tax rate is higher because they reduce the amount of cash taxes. For a corporation, a $100 deduction was worth a $35 reduction in cash taxes before calendar year 2018. However, beginning in 2018 for a calendar year corporate taxpayer, the $100 deduction only saves $21 in taxes. This is where the CARES Act can help.
Opportunities for net operating losses
The CARES Act may give you a second chance for years when you had a net operating loss on your tax return to apply those losses against the higher tax rate years. This means more money in your pocket today. For a calendar year taxpayer, this can go as far back as 2013. This net operating loss rule works for tax years that begin after December 31, 2017 (i.e. your calendar 2018 tax year begins January 1, 2018 and therefore after December 31, 2017). This means that you may be able to get cash refunds now on taxes you already paid for years that were closed. Calvetti Ferguson’s tax team can help you accomplish this.
Opportunities for research and development credits
Research and development credits often arise from large equipment purchases, integrations, or production modifications. These credits can also arise from software integrations. If you think you may want to investigate research and development credits, now is an excellent time to start. Calvetti Ferguson can help your company gather data and streamline the R&D tax credit study process for your business. If you have never taken the research and development credit, you are permitted to look at all open tax years and file an amended tax return to get a cash refund against taxes you have already paid in prior years.
Opportunities for calendar taxpayers
If you are a calendar taxpayer, this means that your 2016 calendar tax return is likely still open. You can still amend that return up through the most recent tax year. Furthermore, there is a special benefit as a result of the tax rate change. Due to the way the law was written, it is possible to receive more of a benefit for years 2018 and 2019 than it would for the higher tax rate years. Even if you have a loss for 2018 or 2019 it is possible to carry your research credit back a year so you can get your tax refunds now. As you may imagine, refunds from these credits as well as the net operating losses are possible. Like most tax opportunities, the time to claim these benefits is limited since tax years close over time.
Your tax team at Calvetti Ferguson can help you coordinate these two tax provisions to maximize the cash tax refund for your business. Although this may sound complicated, we are fully equipped to handle the details and present you with the proper paperwork to sign and file to keep your cash flow as positive as possible.
It can be difficult to make sense of all the new legislation passed in the wake of COVID-19. Contact us to learn more about these exciting tax benefits and how this can apply to your business. Check out our COVID-19 Resources page for more information.