How the CARES Act Could Impact Year-end Tax Planning
This year’s been anything but ordinary, and when you consider all of the curveballs thrown at business owners this year, it’s safe to say the 2020 tax filing process could present new challenges as well—especially in the midst of potential new CARES Act rulings and impending changes.
So, what exactly about this year’s filing will be out of the norm? Ratchet+Wrench checked in with Eric Joern, an accountant for James Hamlin & Co. with a primary focus on the automotive industry, for more insight on the details shop owners should keep top of mind as they round out the year.
First things first, when exactly should end-of-year tax planning really begin?
It’s best to start creating a baseline at the end of your first quarter, which usually comes around at the same time that you're filing your previous year tax return.
Based on that first quarter’s performance, you can project where you expect to be at the end of the year profit-wise and adjust as you go from there so that in that final quarter, you have an idea of the kind of end-of-the-year purchases you’re able to make. Maybe that’s going to look like bonuses for your staff or investing in some new tools or buying a new lift for the shop, but it really is something you should be working on and mindful of throughout the year with the bulk of those decisions being made in that final quarter.
And depending on how you’re filing, you may have a bit more time (slightly different rules apply if you plan to give bonuses) but you should have your plans and forms firmed up and ready to go by December 31.
How could elements like PPP loans impact tax filing for this year?
PPP’s certainly been a hot topic this year just with the large number of businesses that applied and were able to receive loans.
When Congress released the CARES Act, we initially thought the intent was for there to be no tax effect on those funds. The IRS came out pretty early on and took a stance that they wouldn't let business owners deduct those expenses but there were some things we didn’t know at that time, especially when it comes to timing. Would that rule apply to the year you paid those expenses or the year in which the loan is actually forgiven?
We know now it's the year that you paid those expenses, so that was eventually clarified and right before Thanksgiving the IRS actually issued a revenue ruling which gives us those instructions we’ve been looking for on how to handle those PPP factors.
What they’ve decided is that you're not allowed to take a deduction for the expenses that you're using to get that PPP loan forgiven, but we've also been expecting Congress to come back and reverse the IRS’ stance on that, so right now we’ve got to stay tuned. We’re hoping that update could come with the passing of the next part of the stimulus bill.
All that’s to say, there are still changes coming down the road that could impact the 2020 tax filing, but we might not know or have those changes clarified until right at the time you need to file.
What could that mean for shop owners?
The IRS wants you to pay in your tax before your return is due, so shop owners are going to want to make sure they pay in enough estimated tax payments to cover the PPP income they may have brought in.
Shop owners could also potentially take advantage of safe harbor rules and policies, but will want consult with an accountant or CPA of some sort to make sure that’s the right move for them.
Is there anything about this year’s tax filing that might surprise business owners?
Aside from PPP, the other surprise factor for some business owners who haven’t dealt with it before is unemployment. A lot of people forget that that income is taxable and it usually comes as an unpleasant surprise later on. That’s something you want to plan for and the impact it will have depends on who received the income.
I know there were some shops that had to shut down for a while and so it’s helpful for shop owners to keep that unemployment piece in mind both for themselves and for their employees. Part of being a good employee is helping out your employees as well, so if shop owners can get that on employee’s radar, it’s always helpful at the end of the day. That’s definitely something I’m recommending to clients.
Should shop owners file early this year?
Waiting until the last minute always becomes an opportunity for you to deal with a surprise, but actually this year’s a little different. Because there are those potential CARES Act changes coming down the line, we’re advising business owners to be prepared to file, but wait for finalization. You still want to have everything ready to go in advance, you just wouldn’t send right away. That way if any changes come through at the last minute, you have time to make adjustments before you submit.
For more insight from Joern, you can see him speak at this year’s Professional Automotive Virtual Education (PAVE) Conference taking place from January 8-10, 2021, where he'll present on back office best practices as a part of the event's 30 live training sessions.