Massive Tax Incentive! Newly introduced!

The recently enacted Coronavirus Aid, Relief, and Economic Security Act (the CARES Act or ‘the Act’) reinstates the ability for taxpayers to deduct current year tax losses against income from a prior tax year and receive immediate tax refund.

The concept of a net operating loss carryback (NOLCB) is intriguing. Normally, when one’s income tax payment is remitted, it is remitted. However, NOLCB actually allows tax payments from up to five years ago to be refunded, due to a loss incurred in the current year. This may have implications for companies who are looking to purchase machines in 2020.

Here is a simple illustration.

Your company (C corporation) has net income of $300,000 in 2020. You are considering the purchase of a $1,000,000 machine to help manage and grow your business. Allowing a $1,000,000 depreciation deduction on the equipment for this year. The resulting tax loss is $700,000. The Act allows this loss to carry back to tax year 2015 and applied against your 2015 taxable income. This will result in a reduction of $700,000 in 2015 taxable income. Which is a tax refund of $245,000 at the federal corporate tax rate of 35% (if C corp). If the loss is not fully absorbed by 2015 income, the remaining loss can be carried to 2016, 2017 tax years, etc. Until fully absorbed by prior year taxable income.

The same regulations apply to S corporation or LLC pass-through entities. The difference, the net operating loss will be reported on the shareholder’s or LLC member’s individual income tax return (Form 1040).

A result of the economy lockdown from the Coronavirus pandemic, many companies will experience a significant decline in income in 2020. With the acquisition of machinery & equipment (and 100% bonus depreciation), a taxpayer can receive income tax refunds from as far back as 2015.

While it may be a daunting task to make a significant capital acquisition in the current economy, companies that are able to weather the storm can position their business(es) for a robust rebound through the CARES Act. Have a tax advisor evaluate this tax provision, it could prove to be beneficial to your organization.

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    What does all this mean?

    Back in 2015, 2016 etc the tax rates were higher than they are now. Example, corporate tax rate for a C corporation was 35% in 2015 versus 21% in 2020. You will get a larger refund from the government by taking the depreciation allowance from prior years at a higher tax rate. C corporations have a larger savings than Sub S or LLC’s.

    Another twist.

    Companies can finance a machine and only make several payments in 2020. And, still get the 100% depreciation for 2020 and carry back the losses and get money back from the government. Thus, creating a positive cash flow while they are building the business back up.

    ACT NOW! Finance a machine with delivery in December, make your first payment in January 2021 and still get 100% of the depreciation this year!



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