Companies that want to find ways to maximize net operating losses can get bigger refunds under tax law changes, to help them get through the economic slowdown, tax expert Randy Schwartzman told Transport Dive sister publication CFO Dive. 

The coronavirus relief bill, enacted last month, removes limits on the use of carryovers from years prior to 2018 and allows for carrying some recent losses back five years. It also favorably changes how deductions work with the use of some losses. 

Bottom line: These changes give CFOs a powerful incentive to maximize their net operating losses (NOL), because of the tax refunds they can generate. 

"The strategy is, how do I maximize my net operating loss that I can carry back? Because the more loss you can carry in 2018, 2019 and 2020, the greater your cash refund," said Schwartzman, a tax partner with BDO USA. "Look at your balance sheet. See if there’s anything you can write off, [such as] software development cost, or prepaid expenses."

He also recommended changing the method of capitalization for inventory. "You take inventory from cost to load to cost to market, because for a lot of them, values went down," he said. 

"Look at every asset on that balance sheet," he continued. "Can I write it off or can I change my method to get a quicker write-off for tax purposes?"

Schwartzman encouraged examining liabilities, too. "Is there any liability there, because I received cash in advance I paid tax on?" he asked. "If so, is there a way I can change my method of accounting to not pay tax on the cash I received? And those will create immediate tax deductions that increase NOL."

Applying for loan funds

CFOs could also consider applying for forgivable loan funds under the Paycheck Protection Program (PPP). The initial $350 billion authorized for the program ran out mid-April, but President Donald Trump signed a new bill Friday, refilling the PPP with $320 billion.

If approved for funds under that program, companies won't be able to take advantage of any other tax benefits in the federal relief bill. But whether that’s a deal-breaker depends on a business's financial situation. 

If 75% of the loan proceeds are used to keep on the people on payroll that would otherwise need to be laid off, the loan is forgiven. If employee-retention criteria isn't met, the loan must be paid back. 

If a business does not receive a loan, or if it receives one but ends up paying it back, it can still get tax help under the federal relief program.

"If you don’t qualify for [the loan or] didn't take it, there's an employer tax credit," he said. "It’s equal to 50% of wages for every employee up to $100,000 in base compensation. So, the most you can get is $10,000 per employee. If you have 100-plus employees, you can only get the credit for those not working. But if you have 100 or fewer, all the wages count. That’s cash from the government to you."

There's also a payroll tax deferral component. The payroll tax deferral amounts to an interest-free loan; the employer portion of your employees' 2020 social security tax does not have to be paid back for up to two years. The employer pays half the taxes at the end of 2021 and the remaining half at the end of 2022. 

Schwartzman said both the loan program and the tax credit will help companies during the downturn, but only one can be taken.

"Strategically, you have to run the numbers, because it depends on the payroll base," he said. "A higher payroll might count for the forgivable loan. They did it in a way to make it work out either way — whichever you choose you'll at least get a benefit."