Tax planning during COVID-19

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Uncertainty. It’s on track to be the overarching theme of 2020. In an environment of uncertainty, two things hold true: It’s important to have a plan, and it’s important to stay flexible.

To be as flexible as possible, a business should be as liquid as possible.

Cash is king
To maximize liquidity, business owners should consider the following strategies:

  • Accelerate collections of receivables (ask for deposits from customers).
  • Defer payment of payables (ask for terms from vendors).
  • Defer investments in equipment.
  • For necessary equipment purchases, maximize financing options.
  • Sell surplus equipment.
  • Manage customer demands and payroll to decrease overtime.

Another valuable method of conserving cash on hand is not paying taxes based on “same as last year.” Many business owners make their quarterly estimated tax payments based solely on the prior year, operating on the presumption they will make greater profit in the current year than the prior. This is known as the “safe harbor” approach.

For the many businesses whose 2020 income will be significantly lower, this approach potentially leads to valuable cash being paid to the government only to have it refunded months later. Not only are you giving away cash, but it may result in the need to obtain other financing with interest charges.

As an alternative to the “safe harbor,” taxpayers have the option to pay only as much tax as is necessarily due on their earnings. In other words, if your business generated no profit in the first half of the year, no tax needs to be paid in the middle of the year. Currently, the quarterly payment schedule for 2020 taxes is July 15 (for quarters one and two), September 15 and January 15. There have been proposals to delay these dates. If further delays are allowed, taxpayers who haven’t planned could be caught by surprise with a large tax payment obligation they are unable to make. With these strategies in our toolbox, a cash flow projection plan can take shape. The projection should identify cash in the bank on a monthly — or better, weekly — basis. Look at multiple cash flow projections: a “worst case” scenario and a “more than likely” scenario. What action could you take now to lessen the impact of the “worst case”? Update the plan as each period passes. Are you creating breathing room in the future, or is there an impending crunch? The sooner you know a problem exists, the sooner you can influence the outcome.

Tax law changes
Legislation passed this year has contained several relief provisions for individuals and businesses. Most individuals should have received their stimulus checks by now. Businesses are afforded relief on previous limitations in their ability to carry back losses to prior years and receive a refund of previously paid tax. Taxpayers are allowed a five-year carry back for losses generated in taxable years beginning in 2018, 2019 or 2020.

Other relief provisions intended to keep cash in the hands of businesses relate to federal payroll taxes. Payroll tax deposits are one of the largest cash expenditures for employers each month, and these new provisions can provide immediate relief. However, you must be mindful of the nuanced regulations at play among the new provisions. It requires thoughtful planning and attention to navigate Paycheck Protection Program loans, the wages qualifying for PPP loan forgiveness, and the numerous payroll tax credits and payment deferrals, all of which are connected.

As always, contact your tax adviser for how these incentives and relief provisions affect your specific situation. There are various “puzzle pieces” to fit together to ensure you’ve taken advantage of those items for which you are eligible.

Tony Cook is a senior manager with Larson Gross. His experience involves all aspects of business and invidual tax advisory services, including tax planning and entity structuring. He serves as the firm’s technical consultant on partnerships and its expert on the Affordable Care Act. Visit www.larsongross.com.