COVID-19 leaves its mark on 2020 tax planning strategies

Now is the time of year when companies start their tax planning, but as with just about everything, the COVID-19 pandemic has created obstacles to normal tax-planning efforts.

Issues ranging from the forgiveness of Paycheck Protection Program loans to delays in 2019 tax filing will impact planning efforts for 2020 taxes.

Jane Spradlin, a shareholder with Concannon Miller Certified Public Accountants in Bethlehem, said there has been much frustration in the accounting field while awaiting decisions from the U.S. Small Business Administration on loan forgiveness for PPP loans.

The most recent SBA guideline update says borrowers who received loans of $50,000 or less from the Paycheck Protection Program will now be forgiven even if they fail to re-hire full time employee count or full time employee compensation to pre-pandemic levels.,

But she said questions still remain for many.

“Loan forgiveness – that’s the thing that’s completely up in the air and there’s no guarantee that a loan is going to be forgiven so your accountant can’t be prepared,” Spradlin said.

She expects many accountants will need to file extensions for their clients to make sure any PPP loans are forgiven.

She explained the complications.

“If the loan is forgiven prior to the tax return being filed, loan forgiveness — or cancellation of debt income — is not taxable and the expenses that were paid with the funds are not deductible under current guidance,” she said. “If the taxpayer does not receive forgiveness by the tax deadline, it would be desirable to extend the filing until there is a resolution on the loan. If the loan is not forgiven and the taxpayer is obligated to pay it back, the expenses are deductible and the loan would be treated as any other loan.”

She said many companies may also be making different decisions about year-end capital investments because of the way the pandemic and shutdown affected their business.

“If a company has had a good year, typical planning includes a review of capital expenditures,” she said. “There are favorable depreciation rules, including 100% bonus and section 179 that enable the taxpayer to ‘expense’ the cost of the equipment in the year it is placed in service.”

She said traditional tax deprecation requires the systematic write off of these costs over varying years from 3-39 years depending on the type of property purchased.

However, under the tax cuts and jobs act, certain businesses can take advantage of a change in accounting method.

Those changes include going from the accrual basis of accounting to the cash basis or vice versa — cash to accrual, changing the inventory method to write off inventory as supplies, and a change to not report inventory costs under code section 263(A).

She said a thorough analysis should be performed to determine the cost benefits of changing a company’s accounting method.

Business owners should consult with their tax adviser regarding the changes as they apply to certain taxpayers based on average gross revenue amounts.

Other year-end planning issues have to do with employee compensation. She said this is generally the time to determine profit sharing contributions to 401(k) plans.  Company contributions are deductible expenses and can be accrued — expensed in the current year — provided the payments are made to the plan by the date the company tax return is filed.

Employee bonuses reduce taxable income as well.

One thing she has advised companies not to do, however, is take advantage of the federal executive order that allows individuals to temporarily not pay their payroll tax that is their portion of Social Security taxes.

“It will create a lot of problems for employers,” she said.

She noted that it’s a deferment, not an elimination of the tax and it will be due next year. That could create liability issues for the employer that withheld that tax for the employee.

“What if your employee can’t pay that back next year? What if an employee leaves? Who becomes liable for that employee’s portion of the tax that the employer withheld on their behalf?” she asked.

She noted that individuals have things to think about as well.

Individual tax planning includes charitable contributions, IRA contributions and deferral of the 2020 required minimum distributions for those that fall under those requirements.

That deferral, she said, might be advantageous since individuals don’t have to take out a minimum amount of money from their IRA at a time when the account may be depleted because of the financial crisis that resulted from the pandemic.

Spradlin said tax preparation might be different this year, but it will be different in unique ways for everyone.

While some businesses and individuals will have to cope with excessive losses this year, some industries did quite well.

She recommends careful planning this year with all of the changes COVID-19 has brought to tax issues.