The amount of information, public opinion, and uncertainty surrounding the pandemic can be confusing and overwhelming. As year-end approaches, many business owners are turning their attention to tax planning and financial projections. This can be a cumbersome undertaking given the unknowns and constantly changing rules and regulations.
Here are a few key considerations for year-end financial statement and tax return planning to ensure you are maximizing all potential opportunities.
There are two options available for presenting and accounting for Paycheck Protection Program (PPP) loans and it is important that management consider the pros and cons of each in relation to both the current and future financial statement periods.
Management may always opt to use the debt model of accounting under Accounting Standards Codification 470, regardless of their ultimate plans or intentions for forgiveness, up until legal repayment or forgiveness is obtained. Alternatively, if management believes it is probable that they will achieve forgiveness of the loan, it may be accounted for as a grant expected to be forgiven, analogous to International Accounting Standard 20, with recognition of forgiveness income equal to covered expense incurred. There are several factors to consider when determining which method is optimal, including certainty, necessity and capability.
The IRS issued Notice 2020-32 earlier this year, which addresses the deductibility of PPP covered expenses. The notice prescribes that to the extent the Coronavirus Aid, Relief, and Economic Security (CARES) Act excludes covered loan forgiveness from taxable income, any expenses that were incurred and funded with PPP proceeds cannot be deducted from taxable income.
The IRS position is that one of the cites referred in the notice stands for the proposition that if a taxpayer has a reasonable expectation of having some or all of the loan forgiven in 2021, the taxpayer cannot deduct the expenses that are related to the amount of the expected loan forgiveness in 2020. So without a legislative change, a taxpayer cannot deduct the expenses allocable to the portion of the loan they reasonably expect will be forgiven.
For taxpayers whose 24-week loan period extends beyond the fiscal 2020 tax year, there may be an opportunity to defer some non-deductible expenses into 2021 for expenses that are not incurred until 2021.
Many companies are facing uncollectible accounts receivable (AR) or expiring inventory that is no longer sellable given downturned economic conditions in many industries. Management should consider charitable donation options when possible, especially for food products.
While the optics of donating unusable inventory is always advantageous, the federal tax deduction for charitable donations of food products allows for an increased deduction amount equal to the lesser of cost plus 50% of margins or two times the cost of the donation. For C corporations, this increased deduction amount is available for non-food donations of inventory as well. As always, it is important to perform an analysis of the cost/benefit of the public relation rewards.
The CARES Act provides taxpayers the opportunity to carry back net operating losses that are generated during the 2018 through 2020 tax years. The losses can be carried back five years to produce a refund of previously paid taxes. However, beginning in 2021, net operating losses can only be carried forward. Consequently, if companies are planning to purchase equipment in the near future, they should consider the impact of placing the equipment into service in 2020 as opposed to 2021. If there is an opportunity to create or increase a net operating loss in 2020 that could be carried back to 2015 to generate a tax refund, this may be more beneficial than waiting to purchase the equipment in 2021. In addition, if any expenses can be properly accelerated into 2020, or if any income can be properly deferred into 2021, that would also increase the 2020 net operating loss.
There are many nuances and opportunities contained within the CARES Act, which requires a deep understanding to properly interpret and implement. Furthermore, specific rules, regulations and standards may be better suited in certain, specific circumstances as opposed to a widespread, general application. While there may be a lot of uncertainty and unresolved issues, the best thing business owners can do is ensure they are evaluating all possible scenarios with their trusted financial advisors.