Situation: “Cash is king” seems to be the catchphrase in these recessionary times.
From a tax standpoint, we want to maximize the receipt of cash for our clients through tax refunds and explore the possibilities of deferring tax payments to preserve cash.
Solution: There are a few opportunities to help your clients keep their cash. If your clients have net operating losses and/or unused tax credits, it is good to know how to expedite claims for tax refunds.
Net operating losses. The general rule for NOLs is a two-year carry-back period and a 20-year carry-over period. However, proposed legislation includes consideration of an extension of the carry-back period to five years.
According to the House version of the proposed legislation, the NOL may be reduced permanently by 10% if the five year carry-back is elected.
It appears that a taxpayer will be able to elect either the five-year carry-back period or the two-year carry-back period. It is also possible to elect to forgo any carry-back periods.
General business credits. General business credits consist of a number of different credits, including energy credits, research credits and the work opportunity credit. They may be carried back one year and carried over 20 years under current law. Proposed legislation would extend the carry-back period from one year to five years. The proposal would also remove limits on the amount of general business credits that can be used in carry-back years.
Quick refunds. There are opportunities for obtaining “quick refunds.”
Internal Revenue Service Form 4466 is available for corporations to obtain a quick refund of overpayment of estimated taxes. A corporation is eligible for a quick refund if the overpayment is at least 10% of the expected tax liability and at least $500. For calendar year 2008 corporations, Form 4466 must be filed by March 15.
The IRS must act within 45 days of receiving Form 4466.
Taxpayers may also accelerate the receipt of a tax refund by applying for a tentative refund of prior-year taxes by carrying back an NOL or unused business tax credits. A corporation may also use a capital loss carry-back.
Individual taxpayers, as well as trusts and estates, file Form 1045 “Application for Tentative Refund.” Corporations use Form 1139 “Corporation Application for Tentative Refunds.” Form 1045 and Form 1139 must be filed within 12 months following the end of the loss year.
The IRS must generally act within 90 days of receiving the application. If it does not issue a refund within 45 days, interest may be due. One disadvantage of filing for a tentative refund on either Form 1045 or Form 1139 is the special statute of limitations that opens up the statute of limitations for the carry-back year for adjustments up to the amount of the tentative refund.
Form 8302 can be filed for electronic deposit of refunds of $1 million or more. For refunds over $2 million, approval by the Joint Committee on Taxation is not required.
There also may be an opportunity to use special congressional and IRS channels to expedite refunds in certain hardship cases.
Deferral of tax payments due. On the other end of the spectrum, tax deferrals are available for taxpayers unable to pay taxes currently due to lack of cash flow. The possibility of extending and deferring tax payments include deferral offered by Form 9465, "Installment Agreement Request." Form 9465 can be completed online electronically at irs.gov if the combined tax, interest and penalty liability is $25,000 or less. Form 911, "Request for Taxpayer Advocate Assistance," can be used for deferral of tax payments in the case of hardship.
IRS eases the rules on federal tax liens. IRS Information Release 2008-141 recently announced an expedited process that will make it easier for financially distressed homeowners to avoid having a federal tax lien block their ability to refinance their mortgage or sell their home to improve cash flow.
