This article was updated July 24, 2023.
Cash flow, especially during turbulent times, is essential to business, and can be severely affected by delayed payments from purchasers or customers, unexpected expenses, closings, and other operational restrictions.
One way to improve cash flow is to revisit state and local tax (SALT) obligations and opportunities. While each jurisdiction can vary on approach to taxation, programs, and timing, here are some significant SALT areas for your company to consider.
Real estate, inventories, equipment, facilities, offices, storefronts, or other property will generally be assessed on a specified taxable value.
Because of conditions since 2020 including the COVID-19 pandemic, supply chain limitations, rising interest rates, and global economic slowdown, business owners should consider if taxable values, which are largely based on productivity, use, and market comparisons, are the same as they were before the economic downturn. If not, will such values bounce back?
In most jurisdictions, the taxable value can be reviewed and adjusted to reflect updated values. A tailored review of asset classification, valuation, use, applicable exemptions, and other data used to determine taxable value may help lower current and future property taxes as well as potentially provide for a tax refund.
If you think you can reduce your property tax obligations, here’s a list of considerations:
- Review real property tax assessment values. If they seem high, consider a personal or real property assessment study to flag potential appeal opportunities and substantiate any reduction in assessed value.
- Examine fixed asset listings. If the tangible or intangible property is out-of-service, under-utilized, or its usefulness is impacted by trending factors, an asset review can help determine the correct value and taxability of the property.
- Look for special exemptions and abatements that may have been overlooked. In many jurisdictions, they aren’t openly shared or lack information on how to apply. For example, a Freeport Exemption can substantially reduce property tax on inventory holdings in certain states. A thorough review of available exemptions and abatement by a knowledgeable property tax practitioner can provide substantial tax savings.
Sales and Use Tax
Prior to the pandemic, business expenditures on new equipment, buildings, software, and other assets were strong. Many jurisdictions provided exemptions, exclusions, deferrals, or credits for companies that purchased assets for certain uses and locations, including manufacturing, medical, pollution control, designated enterprise zones, resale, research and development, aerospace, farming, and many others.
When the economy was roaring forward, a number of these exemptions, deferrals, or credits were likely overlooked. With cash flow the priority for most, companies that have made substantial business purchases can now seek to recoup the taxes associated with these purchases.
Companies with qualifying expenditures can apply for sales, use, or gross receipts tax refunds with their taxing jurisdictions, or in some cases, can accelerate refund timing by filing with their vendor. Reviewing past expenditures and identifying opportunities can result in companies saving material indirect tax.
- Consult with your state and local tax advisor on prior expenditures to determine eligibility for refunds, exemptions, and credits
- Review the timing of purchases to verify refund claims are protected against jurisdictional imposed statute of limitations that would cause eligible refunds to expire
- Gather all supporting documentation, including detailed listings of purchases, uses, locations, and other operational facts, and file refund claims under the direction of your tax advisor to confirm all opportunities are captured efficiently and effectively
Prior to the impacts of the pandemic, certain companies operated in taxable income positions and paid tax to state and local taxing jurisdictions. However, since 2020, many are operating in loss positions or have had substantial operational changes in their business. These events should be evaluated for their impact to collect previously paid tax via refund claims from state and local taxing jurisdictions.
New laws around pass-through entity tax, states’ aggressive action towards nexus and sales sourcing, and the increase of audit activity to fill budget gaps can lead to opportunities for cash tax savings.
Companies that have paid substantial state income or franchise taxes could be eligible for cash refunds. Several factors to evaluate for opportunity include:
- Net operating loss (NOL) carrybacks
- Business interest limitations: Internal Revenue Code (IRC) Section 163(j)
- Cancelation of debt analysis
- R&D expenditures
These are all areas of potential opportunity for companies to recoup prior taxes paid or retain a position for future benefits.
Pass-through entities that are producing taxable income to owners who have a limitation on their state tax deduction for federal income tax purposes should consider making a pass-through entity tax election. This can save cash taxes for the owners when they file their federal income tax returns.
Companies selling tangible personal property or providing services should review their revenue sourcing. Multiple law and rule changes across the United States could lead to changes on where sales are sourced and result in tax savings.
- Evaluate current tax filings and past tax expenditures to target opportunities
- Explore alternative filing methodologies with your state and local tax advisor based on your company’s operational facts and business activities
- Consult with your state and local tax advisor on an approach to file and claim tax refund opportunities
Credits and Incentives
Given recent federal and state laws targeting the green initiative, there are several credit and incentive opportunities to save cash. Because of the Inflation Reduction Act and various state laws linked to it, companies implementing green initiatives can benefit from significant federal and state tax credits.
Companies paying high federal and state taxes, but not in a credit generating position, can purchase many of these unused credits on the open market, as most of these credits are transferable.
There are several ways within the Inflation Reduction Act to generate tax credits related to the production and investment in green technology, carbon capture technology, and clean commercial vehicles. Many of these credits are transferable to unrelated parties.
- Evaluate current and planned expenditures that may qualify for investment tax credits
- Review production activities and whether the company is producing green technology or component parts integrated into green technology
- Consult with a tax advisor regarding available credits for purchase on the open market
We’re Here to Help
For assistance identifying, preparing for, and pursuing cash flow opportunities, consult your Moss Adams professional.