Are you taking advantage of CARES ACT opportunities for tax refunds?

By Elvira Lawlor, CPA, MBA          
Gray, Gray & Gray, LLP       

The research and development (R&D) tax credit is one of the most powerful tools your architectural or engineering firm could use to ease your tax burden. In light of the global pandemic, with many businesses struggling to stay afloat, R&D could become a great boost to your cash flow. The recently passed CARES Act provides a unique opportunity for R&D and net operating loss interplay. Those who may qualify should take a close look at eligibility.

How does it work?

Previously, net operating loss (NOL) carryback for tax years beginning on or after January 1, 2018 and later years was eliminated by the Tax Cuts and Jobs Act (TCJA). The Act also called for an 80% taxable income limitation that prevented many businesses from fully utilizing their losses. The CARES Act, passed in March 2020, allows organizations to carry back any NOL from the 2018, 2019, and 2020 tax years to each of the five taxable years preceding the taxable year in which the loss originated (Rev.Proc. 2020-24). Additionally, the Act suspends the 80% limitation through the 2020 tax year. Given higher tax rates of pre-TCJA years, NOL carryback provides an opportunity to secure permanent tax savings.

How does that relate to R&D?

An NOL carryback can provide an opportunity to claim credits and other tax attributes unclaimed on the original return and carry them forward. Section 6511(d)(2) provides a special period of limitation with respect to NOL. In situations when NOL affects otherwise allowable credits, NOL takes precedence over the business credits (IRM 4.11.11.9). While Sec. 6511 bars refunds for years in which the statute of limitations for claiming the credit has expired, it does not prohibit a taxpayer from claiming the refund as a carryforward of its unused business credit to an open year. Thus, if the carryback of a NOL creates unused business credit in the carryback year, such credit could be used in open years. In addition, NOLs can lower taxable income in prior years where the R&D credit was claimed and release the credit previously used. The released credit could be carried forward up to 20 years.

The COVID-19 legislation provided numerous relief opportunities for taxpayers. As always, you should consult with a qualified tax advisor to determine your best course of action. For more information on this and other issues concerning architectural, engineering and design firms, please call Gray, Gray & Gray at 781.407.0300 or visit our website at www.gggllp.com.

Elvira Lawlor is a member of the Architecture, Engineering & Design practice group at Gray, Gray & Gray, a Massachusetts-based business consulting and accounting firm. (www.gggllp.com)

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