As the world continues to contend with the COVID-19 pandemic and its economic fallout, businesses are doing all they can to mitigate risks and plan for a recovery that’s anything but certain.

The tax function plays a critical role in navigating recovery and positioning businesses to emerge from this crisis more resilient than before. Effective tax strategy can preserve liquidity, lower costs and work in tandem with overall business strategy.

Finding Relief: Tax Strategies to Generate Immediate Cash Flow

During “the dip” immediately following a crisis, businesses of all sizes are in triage mode, taking immediate action to both protect their employees and keep the lights on. Achieving these goals requires agility, strategy and resilience, as well as liquidity.

While not exhaustive, here are several tax strategies to consider:

  • Debt and Losses Optimization
    • File net operating loss (NOL) carryback and alternative minimum tax (AMT) credit refund claims to reduce tax payments and obtain immediate refunds for taxes paid in prior years.
    • File Form 1138 to relieve 2019 tax payments due with the 2019 returns for corporations expecting a 2020 loss that could be carried back to the earlier year.
    • Analyze the tax impact of income resulting from the cancellation of debt in the course of a debt restructuring for possible exceptions due to insolvency or bankruptcy.
    • Consider claiming losses related to worthless, damaged or abandoned property to generate ordinary losses under for specific assets, for insolvent investments in subsidiaries that are at least 80% owned (under Section 165(g)(3)) and for certain insolvent investment entities taxed as partnerships.
  • International Tax Savings
    • Review U.S. customs and duties for relaxed tariffs on some products and watch for extensions to pay duties, taxes and fees.
    • Mobilize cash from foreign operations while considering repatriation costs (e.g., previously taxed earnings and profits and basis amounts, withholding taxes, local reserve restrictions, Sections 956 and 245A).
  • Making the Most of Legislation
    • Understand how the CARES Act can provide relief to employers:
      • Defer payment of the employer’s share of Social Security taxes (i.e., 6.2% of payroll; deferral of Medicare taxes is not allowed). Deferral is allowed only until the earlier of (1) Dec. 31, 2020, or (2) the date the employer’s Paycheck Protection Program (PPP) loan is forgiven. Half of the deferred deposit must be repaid by Dec. 31, 2021, and the other half must be repaid by Dec. 31, 2022. The deposit deferral is not subject to interest or penalties if the deferred amounts are timely repaid.
  • Secure a quick tax refund in 90 days by using Form 1139 to file for a five-year NOL carryback for losses generated in 2018 through 2020. Taxable income for a year can be fully offset due to a temporary suspension of the 80% income limitation.
  • Consider the Employee Retention Credit, which allows for a refundable payroll tax credit for eligible employers harmed by COVID-19. The credit is equal to 50% of up to $10,000 in qualified wages per employee (i.e., a total of $5,000 per employee). Employers generally are not eligible for the Employee Retention Credit if any member of their controlled or affiliated service group obtained a PPP loan.

Regardless of which tax strategies you choose to leverage, keeping the focus on generating and retaining cash will ensure that your business is prepared to weather an extended period of disruption.

Optimizing Operations: Uncover Tax Relief Opportunities

During “the Trough” period of economic recovery, the initial tumult of the pandemic and economic fallout has passed, but significant challenges remain. Although companies that have managed to survive up to this point will have overcome immediate safety and cashflow problems, they still face an uncertain future.

After taking advantage of tax solutions that are within reach, it’s time to consider low-risk strategies that will plant the seed for future growth.

Consider which tax strategies can help you find a competitive edge, including:

  • Uncovering missed opportunities for savings: Look for potential projects that, though they may require an upfront investment of time and capital, have the potential to reveal significant savings opportunities.
    • R&D tax credit studies: The money companies spend on technology and innovation can offset payroll and income taxes via R&D tax credits. The credits benefit a broad range of companies across industries, yet many businesses are leaving money on the table.
    • Cost segregation studies: Cost segregation studies can help owners of commercial or residential buildings increase cash flow by accelerating federal tax depreciation of construction-related assets. The extension of bonus depreciation for assets with a useful life of 20 years or less, including qualified improvement property as corrected by the CARES Act, will substantially enhance the benefit of these studies. Depending on the type of building and cost, the increased cash-flow and time-value benefits are often significant.
    • State and local credits and incentives projects: By taking advantage of existing programs, as well as those implemented as a result of COVID-19, companies can qualify for state tax credits and business incentives. These programs help companies maintain payroll, manage business costs, such as utilities, and facilitate capital investment.
    • Opportunity zone program: This federal program is structured to encourage investors to shift capital from existing assets to distressed, low-income areas, and in doing so, deferring and even reducing taxes. While investment in opportunity zones has slowed recently, COVID-19 and additional guidance has created renewed interest in using this program to assist with underserved communities and to provide tax relief for investors.
    • Bonus depreciation:  Allows for 100% cost deduction for assets placed in service during the tax year.
    • Consider paying expenses this year instead of January if you are a cash basis taxpayer.
  • Maintaining compliance: If your business secured any federal funding in the early stages of the pandemic, those funds likely came with certain tax and financial reporting compliance measures attached.

Businesses that effectively use tax strategies to focus on seizing the strategic opportunities they do have will be able to make the most of tough conditions and emerge as market leaders.

Moving Forward: Adopt New Business Strategies to Reimagine the Future

In the recovery phase, demand for goods and services has returned to pre-pandemic-recession levels. The wisest companies won’t spend this time resting on their laurels but will instead use it to reimagine their futures in a world forever changed.

It’s time to reset vision and strategy—and tax needs to be an integral part of that process.

Here are some ways that tax can align with new business strategies:

  • Finances: As demand for products and services increases, it’s likely that profits will grow as well, meaning many companies that may have been incurring losses may find themselves with taxable income again.
    • Tax Considerations:
      • Optimize the use of any available credits, incentives, deductions, exemptions or other tax breaks
      • Maximize the benefit of changes to the net operating loss rules included in the CARES Act
  • Transactions: Many businesses may be considering strategic transactions, such as acquiring another company, merging with a peer, selling certain assets or purchasing new resources.
    • Tax Considerations:
      • Identify loss companies and plan around utilizing losses and credits
      • Structure acquisitions and divestitures in a tax-efficient manner to increase after-tax cash flow
  • Innovation: As companies reconfigure their businesses to adapt to COVID-19 changes that are here to stay—from greater shifts to e-commerce to outsourced back office functions to partially remote work arrangements—they should determine how to use tax strategies to offset the costs of these investments.
    • Tax Considerations:
      • Consider using federal, state or even other countries’ R&D tax credits to offset costs of new products, processes, software and other innovations
      • Explore whether previously undertaken activities may have qualified for these credits as well
  • Regulations and Legislation: As the economy improves, regulatory oversight likely will increase as well. Noncompliance can be costly and can reverse much of the progress a business has made in its recovery.
    • Tax Considerations:
      • Ensure compliance with rules around federal funding received during the pandemic
      • Monitor tax regulatory and legislative developments at all levels, especially in the area of digital taxation, post-election tax reform, and federal, state and local policy changes

Whatever pivots your business takes once the worst has passed, tax strategy needs to be an integral part of the plan to move forward. Evolving your tax strategy alongside business strategy will help prevent unforeseen costs and maximize potential savings.

Planning for What’s Next: Be Prepared to Seize Opportunities

The reality for many is that it may take years to get the phase when a business is meeting or even exceeding market growth. During this stage, a company has fully recovered from the business challenges of the pandemic-recession and is experiencing significant growth. It’s a time when many businesses will be executing the long-term plans they’ve crafted throughout their recovery journey.

Key Tax Strategies

  • Use tax transformation to maintain a broad view of your total tax liability
  • As a business executes on tax transformation plans, it should leverage automated solutions for manual and error-prone areas, including state and local sales and use taxation, value added tax, etc.
  • Consider the tax benefits of outsourcing non-essential functions to third parties to lower a company’s total tax liability
  • Consider alternative legal entity structures to minimize total tax liability and enterprise risk
  • Continuously iterate and adjust tax strategies to align with overall business strategies

Most importantly, companies need to continue to plan for what’s next. While the immediate threat of the pandemic has abated in this stage, new threats are inevitable. But alongside those threats come new opportunities for the businesses poised to seize them.