Tax relief is an integral part of a company’s cash flow management. Expensing reduces the user cost of capital, and tax credits reduce the amount of tax owed. COVID-19 related measures add complexity, but CFOs and Finance can manage cash flow while taking advantage of COVID-19. Here are four strategies to maximize tax relief. This article is based on an NFIB survey of small business owners.
Tax credits reduce the tax you owe
There are two ways to lower your tax liability: taking advantage of tax deductions or credits. The former reduces your tax liability dollar for dollar, while the latter lowers the amount of income subject to taxes. For example, if you earned $20,000 this year, you could qualify for a $1,500 tax credit. Of course, the tax credit you receive will depend on your income, age, and filing status. With the help of the best tax relief companies 2022 | TaxRise, you can learn how to reduce your tax obligations.
There are two kinds of tax credits: refundable and nonrefundable. Refundable credits can reduce your tax liability to zero, while nonrefundable credits are paid out in full. Refundable tax credits are available for certain expenditures, including mortgage interest, retirement savings contribution, and education. For example, you can use these credits to offset the cost of educational expenses, child care, adoption, or adoption.
Expensing lowers the user cost of capital.
The financial statements of companies are influenced by the method of recording costs. While capitalizing costs increases cash flow, they also reduce operating cash flow. Expensing fees deduct from revenue and do not enhance the value of an asset. For example, a business might purchase a van for $60,000 and choose to capitalize on the cost. This would mean that the van will have a useful life of more than one year, and depreciation would be recorded for each year.
By capitalizing on expenses, a company can increase the number of assets on its balance sheet, thereby increasing profitability. However, the same asset is depreciated over its life, whereas expensing has no depreciation expense. Therefore, expensing increases profitability and presents profitability ratios more favorable than capitalizing. So what does expensing mean to a business?
COVID-19 related measures add complexity
As the complexity of COVID-19 continues to increase, the underlying statutory requirements to calculate the effective tax rate are more complex than ever. As a result, companies must determine whether the new measures will impact them similarly as before. For example, COVID-19 requires entities to identify and disclose material items separately, including restructuring provisions and impairment losses on non-financial assets. However, not all adjusting events are subject to the new rules. Therefore, entities must evaluate each adjusting event to determine whether it reflects conditions at the end of the reporting period.
As the COVID-19 pandemic continues to present significant challenges worldwide, organizations must rethink their business strategies and focus on the most critical business areas. However, this new tax regime requires organizations to consider the larger context of their operations to make informed decisions that will drive their operations forward. Therefore, a new tool has been created to help companies understand COVID-19-related measures, showing the territory’s most up-to-date responses. It will be updated over time as changes arise.
CFOs and Finance can manage tax cash flow.
Managing COVID-19 tax cash flow and the associated risks and opportunities requires proactive financial management. In the near term, companies can use cash tax planning to reduce the amount of money paid to the IRS. However, companies can take advantage of COVID-19-related measures to maximize their cash flow for a long time. For example, companies can increase their float amount by extending payment terms to their suppliers.
A variety of asset categories may be affected by COVID-19. For example, if you rely on foreign suppliers, now may be a good time to diversify your supply chain or lock-in critical forward contracts. Additionally, the dollar’s recent strength has allowed companies to buy options or forward contracts. As a result, CFOs and Finance can take advantage of COVID-19-related measures while managing tax cash flow.