How Amending Previous Years’ Tax Returns Can Possibly Free Up Cash
Kenneth Tornheim, CPA, CFE
For many manufacturers, 2020 has been a year like no other due to the novel coronavirus (COVID-19) pandemic, and cash flow is a major issue. The Coronavirus Aid, Relief, and Economic Security (CARES) Act retroactively modifies certain business-related sections of the Tax Cuts and Jobs Act (TCJA) that can help provide quick liquidity. To take full advantage of these CARES Act provisions, you may need to file one or more amended tax returns.
More favorable loss deduction rules
A net operating loss (NOL) generally occurs when a company’s deductible expenses exceed its income. Under the TCJA, for NOLs that arise in tax years starting after December 31, 2017, the maximum amount of taxable income that can be offset with NOL deductions is generally reduced from 100% to 80%. Also, under the TCJA, NOLs incurred in tax years ending after December 31, 2017, generally cannot be carried back to an earlier tax year but can be carried forward indefinitely (as opposed to the 20-year limit under pre-TCJA law).
Under the CARES Act, for NOLs arising in 2018, 2019 or 2020, businesses can now carry back the NOLs to the prior five tax years. In addition, for tax years beginning before 2021, businesses are generally allowed an NOL deduction equal to 100% of taxable income.
This means that businesses can potentially carry back an NOL as far as 2013 (if generated in 2018). Carrying back an NOL is particularly beneficial if you were previously in a higher tax bracket. Filing an amended return to secure a tax refund will help improve your cash flow.
Noncorporate taxpayers may benefit from another loss-related change made by the CARES Act. The TCJA had set a new limit applicable to deductions for current-year business losses incurred by noncorporate taxpayers, known as the “excess business loss” limitation. The CARES Act retroactively turns off the limitation for 2018, 2019 and 2020.
If you were subject to the limitation in 2018 (or 2019, if you’ve filed a return already), you can file an amended return to remove the limitation. That will either 1) further reduce your tax liability, which will produce a refund, or 2) create an NOL, which can now be carried back.
Liberalized business interest expense limitation
Generally, under the TCJA, interest paid or accrued by a business is deductible only up to 30% of adjusted taxable income (ATI). Taxpayers with average annual gross receipts of $25 million or less for the three previous tax years are generally exempt from the interest deduction limitation. So, many smaller manufacturers are already exempt from this rule.
But if this rule applies to your business, the CARES Act generally increases the business interest expense limitation for the years 2019 and 2020 from 30% to 50% of ATI. It also allows businesses to use 2019 ATI in calculating their 2020 limitation.
This means that some manufacturing companies should be able to deduct more interest expense in 2019 and 2020. If an NOL is generated (or increased) in either of those years because of the bigger interest expense deduction, that NOL may be carried back to earlier years, and it will not be subject to the 80% limitation.
If your cash flow is tight, the CARES Act may help. Contact your tax professional to learn more and possibly get started on filing amended federal returns.
Sidebar: Got QIP? It may save you tax now and in the future
Another tax-relief provision of the CARES Act that may help cash flow involves real estate qualified improvement property (QIP).
Under the TCJA, QIP is defined as an improvement to an interior portion of a nonresidential building that’s placed in service after the date the building was first placed in service. When drafting the TCJA, members of Congress intended to designate QIP as 15-year property, making it eligible for 100% bonus depreciation. However, due to a drafting error, the 15-year-property designation for QIP never made it into the actual statutory language of the TCJA, and therefore, QIP was classified as 39-year property.
Effective for property placed in service after 2017, the CARES Act corrects this drafting error. As a result, if you had QIP in 2018 (or in 2019 and have already filed your 2019 return), you can file an amended return to 1) switch from a 39-year recovery period to a 15-year recovery period, or 2) claim 100% bonus depreciation on QIP. Alternatively, you can file Form 3115 (Application for Change in Accounting Method) to claim an adjustment.
Related Read: CARES Act Issues Facing Real Estate Clients
Four Strategies for Closing the Skills Gap
Brandon W. Vahl, CPA, CFE
As technology continues to advance at a dizzying pace, manufacturers are facing a growing skills gap. The increasing role of automation, robotics, machine learning, artificial intelligence and other innovations is rendering many traditional manufacturing jobs obsolete. At the same time, manufacturers are finding that the skilled workers they need to operate a modern facility are in short supply. The situation is exacerbated by a tight labor market and millions of retiring Baby Boomers.
According to the 2019 4th Quarter Manufacturers’ Outlook Survey by the National Association of Manufacturers (NAM), attracting and retaining a quality workforce is the greatest challenge manufacturers face. It was cited by 64% of survey respondents and has been the top concern in nine consecutive surveys.
In NAM’s 3rd Quarter 2019 survey, nearly 79% of respondents said they had open positions they were struggling to fill. In addition, the inability to find sufficient talent had forced around one-third of respondents to turn down business opportunities.
Related Read: Work Opportunity Tax Credit Extended Through 2020
Closing the gap
What can manufacturers do to close the gap? Here are four strategies:
- Offer Internships and Returnships
Internships provide a relatively risk-free environment in which prospective employees can explore new job opportunities, hone existing skills and learn new ones, while the employer has an opportunity to evaluate potential new hires. Typically, interns are students or recent graduates.
But focusing exclusively on young people ignores a potentially rich source of talent: Those who have been out of the workforce for several years. “Returnships” are internships designed for people who have taken career breaks for various reasons, such as raising children, serving in the military or recovering from a long-term illness. Returnships may also be offered to retirees who decide to re-enter the workforce for financial or other reasons.
- Make the Most of Older Workers
An overlooked strategy is to encourage older workers to stay beyond retirement or even hire workers who are approaching retirement age. These workers may lack certain technical skills, but they often possess irreplaceable institutional knowledge, manufacturing experience and “soft” skills, such as interpersonal and communication skills. Tapping these older workers to mentor and train new hires can be a highly effective strategy for developing the younger generation of workers, who may possess technical skills but often lack the business knowledge, soft skills and professionalism their jobs require.
One approach is to offer older workers a phased retirement. By gradually reducing their workloads and transitioning these workers into less demanding roles, you can accommodate older workers’ need for more flexible schedules, while promoting the transfer of their knowledge and experience to the next generation.
- Upskill and Reskill Your Current Workforce
Many manufacturers believe that the only way to keep pace with technological change is to hire new people with the appropriate skills. But given the skills gap, that may not be an option. Consider teaching new skills to existing workers, enabling them to thrive in their current roles or transition to new technology-focused jobs. Providing this training requires a significant investment, but so does recruiting and onboarding new talent.
The first step is to take inventory of your workforce. To determine whether upskilling and reskilling are viable options, look at whether your current workers have the ability to learn the new skills they will need to adapt in an ever-changing work environment.
- Partner With Local Schools
Consider collaborating with local high schools, community colleges or vocational schools to create skills certification programs and facilitate internships. Not only do these partnerships help develop local talent with the skills you need, but they also serve a public relations function: They help combat the myth that manufacturing jobs are tedious, low-skilled and devoid of intellectual stimulation.
Continuing the digital revolution
As the manufacturing industry continues to change at a staggering pace, it is critical for manufacturers to adapt to new technologies. And that means taking steps to ensure that their workforces are able to adapt with them.