Organizations are looking for ways to increase cash flow and decrease income tax liability, especially during times of economic uncertainty.
Tax credits and deductions help organizations save cash, and keep more of their revenue invested in their businesses. The challenge for taxpayers is knowing what available tax credits exist, and how they can qualify.
What is a tax credit?
A tax credit is an incentive provided in the tax code. Tax credits directly reduce your tax liabilities and they provide an incentive for investing in a particular industry or activity. Both small business tax credits and federal tax credits for businesses are available tax credits.
Tax Credit v. Tax Deduction
The difference between a tax credit and a tax deduction can be confusing, leaving many people with questions. While you may be getting a tax deduction for business expenses, a tax credit is generally more beneficial. Tax credits reduce a tax liability dollar for dollar, whereas available tax deductions reduce taxable income based upon tax rates and generally save only a percentage of the overall tax payment due.
What types of tax credits are there?
There are several types of tax credits and tax deductions businesses can claim. Each has a slightly different set of qualifications and benefits based on the type of project an organization is undertaking. Some available tax credits are permanent while others expire and may be reinstated. The government also offers various tax credits for sectors such as education, energy efficiency, and cybersecurity.
A few to pay attention to include:
Research and Development Tax Credits
Research & Development (R&D) tax credits are designed for companies that are continually improving their existing products or services, or developing new ideas.
Fixed Asset Planning and Cost Segregation
Want to know how to generate cash flow? Fixed asset planning is a great way to identify potential deductions in your fixed assets that can both maximize your cash flow, and reduce your tax liability.
Cost segregation is a key component of fixed asset planning. Cost segregation studies help taxpayers accelerate depreciation deductions which reduce the amount of taxes paid and increase potential cash flow for your organization.
Energy Efficient Tax Credits
Other key tax credits within fixed asset planning are energy incentives. These tax credits are specifically designed to promote renovation or construction of energy efficient facilities.
There are two different tax benefits available for entities who construct or improve their structure’s energy efficiency.
Other Strategies to Increase Cash Flow
Qualified Improvement Property
Qualified Improvement Property (QIP) is a category of building improvement assets that qualify for accelerated depreciation as a result of a recent tax correction. QIP generally includes interior, non-structural improvements made by taxpayers to nonresidential buildings that are placed-in-service after the buildings were originally placed-in-service. In addition to a shorter depreciation recovery period, these assets may also qualify for 100% bonus depreciation or immediate Section 179 expensing.
Small Business Taxpayer Safe Harbors
The Tax Cuts and Jobs Act (TCJA) allows taxpayers with average gross receipts that do not exceed $25 million (adjusted for inflation) to apply certain simplified “safe harbor” methods of accounting for tax purposes. The safe harbor methods permit qualifying small business taxpayers to use the overall cash method of accounting and simplified inventory accounting methods as well as avoid the application of the uniform capitalization rules under section 263A and the requirement to use the percentage-of-completion method under section 460. Utilizing these safe harbors can generate cash savings and simplify a taxpayer’s accounting processes.
Increased Interest Expense Deduction Limits
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) increased the amount of deductible interest expense under section 163(j) to 50% of adjusted taxable income (“ATI”) (from 30%) for 2019 and 2020. Additionally, taxpayers may make or revoke real property or farming business elections by filing an amended tax return for 2018, 2019 or 2020 tax years, potentially increasing the amount of allowable depreciation.
Maximizing Net Operating Loss (“NOL”) Carryback
The CARES Act reinstated a 5-year carryback period for losses generated in 2018, 2019, and 2020 which allows taxpayers to receive immediate cash through recovery of taxes paid in prior years. Additionally, taxpayers can use current losses to offset taxes paid in prior years at potentially higher effective tax rates, generating permanent tax savings. Reviewing your tax accounting methods may create additional deductions to maximize the NOL eligible to be carried back.
COVID-19 Related Losses
Section 165 allows a deduction for losses not compensated for by insurance or otherwise. Taxpayers have incurred a wide range of losses as a result of the COVID-19 pandemic – from unrefunded expenses related to cancelled events to inventory that was spoiled, scrapped or damaged to disposals and abandonments of fixed assets. Properly identifying and quantifying these losses can generate significant tax savings for both individuals and corporations.
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