Quick Refund Opportunity to Help Manage Cash Flow During COVID-19
Many companies experienced strong growth in 2019 that led to record profits and the expectation they would incur a higher tax liability. Corporations are required to remit quarterly estimated tax payments based on their projected taxable income using the existing laws and regulations in place at the time of the calculation. So, what happened when Congress retroactively changed the tax laws for 2019 by passing the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on March 27, 2020? Corporations gained a new refund opportunity—and they must file an application for quick refund to potentially get that cash back into the business for immediate working capital needs.
Form 4466, Application for Quick Refund of Overpayment of Estimated Taxes, is designed to expediate the processing by the IRS of a company’s anticipated overpayment of estimated tax. This application is filed after the end of the corporation’s tax year and before the due date for filing the corporation’s tax return (not including extensions). This allows for companies to request the refund immediately even though they may not file their actual tax return until July 15, 2020, or possibly as late as October 15, 2020, if an extension request is made.
The IRS will act on the application request within 45 days from the date the request is filed, which is considerably sooner than the typical turnaround time for a refund requested on an originally filed tax return.
The expected overpayment could have resulted from any number of changes in tax law that were included in the CARES Act, such as:
- Retroactively correcting the drafting error of the Tax Cuts and Jobs Act related to qualified improvement property (QIP). Prior to the passage of the CARES Act, QIP was required to be depreciated over 39 years and couldn’t take advantage of accelerated depreciation. The CARES Act allows for 100 percent bonus depreciation, i.e., immediately expensing QIP. This could provide a tremendous benefit to any company that purchased, renovated or made improvements to a building or office during 2019 or even as far back as 2018. Taxpayers may be able to claim any missed 2018 deduction on their 2019 tax return by filing Form 3115, Application for Change in Accounting Method, which would result in a catch-up deduction through the related Internal Revenue Code (IRC) Section 481(a) adjustment. See this BKD Thoughtware®article for more information.
- Retroactively increasing the limitation on the deductibility of interest expense under IRC §163(j)(1) from 30 percent to 50 percent for tax years beginning in 2019 and 2020.
- The temporary repeal of taxable income limitation for net operating losses, which previously had limited the available net operating loss deduction to 80 percent of taxable income without regard to the deduction.
- Allowing corporations to claim 100 percent of any outstanding minimum tax credits in 2019 that were previously limited to 50 percent of the outstanding balance.
As of the publishing date of this article, the IRS has posted the Filing and Payment Deadlines Questions and Answers webpage on its website. Question 23 specifically addresses the due date for filing Form 4466 and mentions the due date hasn’t been postponed for calendar-year filers and would be due April 15, 2020. Additional relief has been provided in Notice 2020-20 and Notice 2020-23, which the IRS is in the process of addressing with an update on its website.
Quantifying the effect of all the tax changes in the CARES Act could take weeks or even months as companies and their tax providers work to file a complete and accurate tax return with IRS. If any of the new provisions in the CARES Act reduce the company’s expected taxable income for 2019, the application for quick refund could be a great way for corporations to get that cash back into the company and available for immediate use during this critical time.
As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. For more information, reach out to your BKD Trusted Advisor™ or use the Contact Us Form below.