This article was updated April 15, 2020.
During these uncertain times caused by the COVID-19 pandemic, maintaining your company’s operations and staffing is top-of-mind.
Below is a list of tax tools that can be used to generate a one-time or reoccurring cash flow for your operation.
Quick Refund Available for C Corporations
During times of business disruption, C corporations could be looking to quickly generate increased cash flow.
For C corporations whose estimated tax deposits will significantly exceed their anticipated tax liability, one option is to file a quick refund claim before its original tax return filing date.
This opportunity is only available for C corporations if their anticipated overpayment is:
- At least 10% of its expected tax liability
- At least $500
To apply for the quick refund claim, calendar-year corporations must file Form 4466 no later than July 15.
The IRS will act on the form within 45 days from the date it’s filed. Some states may also allow for a quick refund of income taxes.
If the refund requested by the corporation is greater than the refund due when the return is filed, the corporation will be liable to pay the additional tax and interest when returns are filed.
Research and Development (R&D) Credit
Most aerospace and defense companies have qualifying activities for R&D credits. Typically, the tax savings is 7% to 12% of the qualified expenses.
For example, Moss Adams recently served a Northwest manufacturer of aviation communication equipment where qualified research expenditures of $4 million were identified. This yielded a tax credit of $295,000—roughly 7.4% in tax savings.
R&D tax credits are also available in approximately 40 states to offset state tax liability for additional tax savings.
To learn more, please see Four Things to Know about R&D Tax Credits for the Aerospace Industry.
Cost Segregation Study
Cost segregation is a tax deferral strategy that frontloads depreciation deductions into the early years of ownership by segregating cost components of a building into the proper asset classifications and recovery periods for federal and state income tax purposes.
The end result is significantly shorter tax lives—5-year, 7-year, and 15-year depreciation periods—rather than the standard 39-year depreciation periods. Typically, cost segregation studies on A&D facilities can result in 25% to 50% reclassification into shorter life property.
The following may qualify for accelerated deductions:
- Facilities that have been acquired or constructed in the past 20 years
- New projects under construction or being remodeled
As a result of the new Coronavirus Aid, Relief, and Economic Security (CARES) Act, qualified improvement property (QIP) was retroactively changed to 15-year property dating back to December 31, 2017. Many property owners don’t take advantage of these provisions and end up paying federal and state income taxes sooner than necessary.
Accounting Method Changes for Tax
Below are common method changes often seen within the aerospace and defense sector.
These method changes will complement the CARES ACT signed into law on March 27, 2020, which includes changes to net operating losses (NOL) carry backs and many other tax provisions.
Accrual to Cash
Accrual to cash is an accounting method change that can be an effective way to defer taxable income—especially in the aerospace industry where standard receivable terms are 90 days or more including government contracts. This method change recognizes revenue when actually or constructively received and deducting items of expense when paid.
Taxpayers averaging less than $26 million of revenue over a 3-year period generally qualify for the cash method of accounting.
Deduction of Materials and Supplies
Tangible property regulations provide that materials and supplies may be deducted if they have one or all of the following components:
- Acquired to maintain, repair, or improve
- Consist of fuel, lubricants, and similar items that will be consumed in 12 months or less
- Contain a unit of property with a useful life of less than 12 months
- Include a unit of property that costs $200 or less
- Can be identified in guidance as materials and supplies
Incidental materials and supplies—other than rotatable and temporary spare parts—can be deducted when paid. The change of method to begin deducting materials and supplies is automatic.
Rotable and Temporary Spare Parts
The tangible property regulations issued in 2014 provide three choices to account for rotable and temporary spare parts (R&TSP)—a common scenario in the aerospace sector.
Generally, R&TSPs are deductible in the tax year if such part is disposed of by the taxpayer during that year. Disposals can sometimes take several years and require capitalizing and tracking such assets.
Rather than using the default accounting treatment, a taxpayer may elect to treat R&TSPs as a depreciable asset beginning in the year the part is placed into service. This election is irrevocable and can be made annually for each rotable or temporary spare part and isn’t considered a method of accounting.
Tracking and Recordkeeping
The third and most complicated method of tracking R&TSPs is the optional method under Treasury Regulation 1.162-3(e).
This method has several requirements that include keeping a detailed level of recordkeeping, valuation, and accounting for rotable and temporary spare parts, which can make it undesirable to many taxpayers.
However, taxpayers who are able to track the use of rotable and temporary spare parts may provide the most accelerated deductions since it allows them to deduct the part when it’s first installed.
Changing to the optional method is generally automatic.
Deduction of Subnormal Goods
A company could be allowed to take a tax deduction for the write-down of subnormal goods if careful steps are followed. While many companies record inventory obsolescence reserve on their generally accepted accounting principles (GAAP) financial statements, these reserves aren’t typically deductible for tax until realized.
If steps are taken near to and following year-end, a deduction for subnormal goods is permitted for income tax purposes. The lower inventory valuation must be substantiated by providing evidence of the following:
- Actual offerings
- Actual sales
- Actual contract cancellations
2020 Planning Opportunities
While the COVID-19 pandemic is an unparalleled time, companies can still look to the future and take opportunities to plan for the road ahead.
The Families First Coronavirus Response Act
The Families First Coronavirus Response Act (FFCRA), enacted on March 18, 2020, requires certain employers to provide employees with paid sick leave or expanded family and medical leave for specific reasons related to COVID-19. We recommend you consult with an attorney that specializes in employment law if you have questions about how this act may impact your business.
Additionally, the FFCRA provides temporary tax credits for certain employers and self-employed individuals for emergency paid leave. These provisions will apply from April 1, 2020, to December 31, 2020.
Under FFCRA, covered employers required to provide paid sick leave—or expanded family and medical leave for specific reasons related to COVID-19—will qualify for an immediate dollar-for-dollar tax offset against the payroll taxes they paid each quarter.
The payroll taxes available for retention include:
- Withheld federal income taxes
- Employee-share of Social Security and Medicare taxes
- Employer-share of Social Security and Medicare taxes with respect to all employees
If there aren’t sufficient payroll taxes to cover the cost of qualified sick and child care leave paid, employers will be able to file a request for an accelerated payment from the IRS.
Information continues to change as the federal government responds to the COVID-19 pandemic. Please see our dedicated web page detailing COVID-19 implications for updates.
This section contains information specific to California state tax.
Sales and Use Tax Refund Review
With more than 9,000 state, local, and district-level jurisdictions imposing sales and use taxes, combined with varying tax laws among the states, companies often overlook opportunities for savings that can affect their bottom line. A sales and use tax refund review can help your business identify these missed opportunities by securing sales tax refunds and avoiding overpayments in the future.
The objective is to secure overpaid sales and use tax refund by reviewing company’s purchase-related information—such as fixed assets and accounts payable data along with related invoices—for the last three to four years.
The following manufacturing exemptions are typical opportunities for savings:
- Manufacturing equipment directly used in the manufacturing or processing
- Repair and replacement parts
- Research and development equipment/parts
- Items purchased for resale:
- Wrapping and packaging materials purchased for resale
- Federal and state government purchase-related exemptions
- Non-taxable services
- Other industry and state specific exemptions
This section contains information specific to Washington state tax.
Leveraging Washington Business & Occupation (B&O) Tax
The Washington legislature passed a new law that increases the B&O tax rate paid by commercial aerospace manufacturers by 40% on March 12, 2020. The new law goes into effect on April 1, 2020.
To mitigate the costs associated with this increase, commercial aerospace manufacturers should evaluate whether they’re fully maximizing other aerospace incentive programs available to them—including the two below.
Property and Leasehold Excise Tax Credit
The real property tax credit is applied against B&O taxes paid equal to county property taxes paid on land and buildings used solely for commercial aerospace related manufacturing.
The personal property tax credit is equal to county property taxes paid on qualifying machinery and equipment used in commercial aerospace manufacturing activities.
Qualified Aerospace Product Development Expenditures Credit
The product development credit is applied against B&O taxes and is equal to 1.5% of qualified aerospace research expenditures, including:
- Employee benefits
To the extent the aerospace incentives haven’t been claimed, taxpayers can generally seek a refund of overpaid Washington taxes for four immediately preceding calendar years plus the current tax period—provided the annual incentive survey and report have been timely filed each year.
Washington Department of Revenue Business Relief During COVID-19
The Washington Department of Revenue recently published information regarding the department’s response to the COVID-19 pandemic and the declared state of emergency.
Effective February 29, 2020, through the end of the state of emergency—which has yet to be determined—extensions may be granted for the filing and payment of a broad range of taxes, including:
- Business and occupation tax
- Real estate excise tax assessments
- Leasehold excise tax
- Forest tax
- Other taxes administered by the department
Upon request, the department will provide extensions for filing and paying tax returns.
Requests made after the return’s due date will be considered timely requests and will qualify for the extension.
Extensions will be granted as follows:
- 60 days for monthly returns—applies to February 2020 and March 2020 returns at time of publication
- 30 days for the Q1 2020 return
- 30 days for the Annual 2019 return
We’re Here to Help
If you have any questions about how to increase cash flow for your business, please contact your Moss Adams professional.
Note on COVID-19
During this unparalleled time, we’re closely monitoring the COVID-19 situation as it evolves so we can provide up-to-date guidance and support to help you combat uncertainty. For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: