Last week, the IRS extended the federal income tax deadline for 2019 returns to July 15, 2020, in response to the COVID-19 pandemic—and not just the filing deadline, but the estimated tax payment deadline as well.
Though the numbers for 2019 remain unaffected by 2020’s continued barrage of unexpected health, safety, and economic turns, the new policy and the impacts of the COVID-19 pandemic have brought up several questions and forced many businesses to reevaluate their tax-payment and budgetary plans.
We spoke with three local tax experts at three Dallas firm offices—Big Four giant KPMG, nationwide firm Grant Thornton, and Texas firm Whitley Penn—to offer businesses insight into the IRS extension and provide tips for managing cash flow during these uncertain times. Below, Cassandra Nack, Dallas tax practice leader at Grant Thornton, Felix Lozano, partner in charge of Whitley Penn’s Dallas office, and Kevin Jackson, partner at KPMG’s Dallas office, address their client concerns, offer advice for businesses wishing to extend, and provide financial planning tips for the unpredictable future.
What are the key takeaways surrounding the IRS federal income extension?
Cassandra Nack: The key is for clients to understand what their situation is. Do the calculations, understand what you should be paying on April 15 even though you may not have to, and then really think about where you need your cash the most. You do have this delay of need to file and pay, but communication and understanding where you’re at is going to be crucial because the next quarters will come along pretty quickly. You still need to understand your cash situation and make sure that you’re able to have the information.
Kevin Jackson: It’s more stay tuned, and the reason I say that is there’s going to be a lot of things that are going to come out, right?
They’re talking about payments made to individuals, on behalf of the coronavirus that are going to say, ‘Hey, here’s some money.’ We’ve also heard some proposals that came out [Friday] morning, about how if you make under a certain amount of money, that they should give these people a 90 percent exemption on how much taxes they pay.
You’re going to see more and more proposals that are targeted towards them in the future … And if you saw the thresholds, what they said was, you won’t have to make payments until a three-month delay, but there was a million-dollar cap. So, if you made over a million dollars or owed a million dollars in tax, then you’re not covered by this. You need to make all your payments today, and they already started to do that. I see that number potentially changing to go even lower.
Felix Lozano: While there is now an extension to “file,” you still have to “file” at a later date–keep the process moving by providing your tax advisor with the information they need.
Work with your tax advisor on how best to prepare, but be prepared to pay. Talk with your lending institutions as to what changes they are making on their side. With the delay of filing tax returns and making tax payments, they will surely want to know what you may be doing with that cash until you need it.
How would you advise clients to hold on to cash during these uncertain times?
Cassandra Nack: It depends upon each individual business and how they’ve been impacted. And obviously taking advantage of this 90-day extension. And then also to the extent that revenue is now not going to be where they thought it was going to be from a budget perspective, taxes, in turn, will be lower as well.
We’re also expecting some potential tax credits, and it’s going to come out, that will help the company, but we really are just advising talking to them about what’s going on in their business.
Kevin Jackson: There are a ton of things. There are accounting methods, changes that you can make in terms of how you report things on tax returns method changes. There are ways to restructure companies, especially the larger ones that have global operations all over the world. It may not be the most tax-efficient structure, and there are ways to restructure their companies.
There are things called legal entity rationalization, LER, projects, which are when you take a look at companies and small businesses and look at their structures and say, ‘You’re structured in a way that is highly inefficient and costly to you as an owner,’ so you cut out the number of entities. You consolidate entities. And with that, comes less accounting: fewer folks at each one of those [entities] that has to take care of them, fewer bank accounts.
There’s a lot of state and local tax restructuring. So, the companies that we work with, including individuals, everybody else pays a lot of state tax, a lot of local tax, a lot of sales tax. There are ways that you can go out there and say, ‘Hey, there’s a lot of things you’re paying sales tax on, that may be under the current rules in that state or that you shouldn’t be.’ You’re overpaying, right? … As practitioners, we go out there and try to figure out better ways to structure these local businesses so that they can take advantage of [opportunities to pay fewer taxes].
Felix Lozano: To improve cash flow management businesses should consider reducing or eliminating non-essential expenses such as business travel (consider virtual meetings via Skype or Zoom); reevaluate capital expenditures (maybe defer for three to six months); review all recurring expenses to determine necessity; ask your team members where they can help you identify savings as they are on the front lines and will have some ideas if it means keeping their job.
No one wants to take a pay cut, but it means the difference between having a business or having a job. I believe most team members would consider an adjustment to their pay versus losing their job. Be up front with team members as it is a business, and we are all in this together.
Businesses also need to be talking with their banks regarding modifications/extension of terms or deferral of payments or credit access along with monitoring debt covenants. No one likes surprises, so communication is key.
Have clients been voicing concerns about next year already? If so, what do you think filing will be like next year?
Cassandra Nack: Because, even for 2020, taxes are due periodically through the year for most higher net-worth individuals—certainly, for companies [as well]— it’s something that people are thinking about because we’ll have to be addressed in real-time … I do think that getting through 2019, most people, for the most part, or a large majority of people, are probably paid in.
For 2019, it’s a matter of gathering the documentation, getting it to your preparer, having the technology to get things back and forth, and get returns filed and signed. I think 2020 taxes will be more a matter of how has this impacted your business? How has it changed what you think your taxes are going to be and your liquidity ability to pay those taxes?
Kevin Jackson: Right now, people are focused on the short term …Everyone has thrown in the towel in the second quarter. Everyone is looking at the third-quarter now. What can we do? Do we think it’s going to come out? Is there a way we can position ourselves to take advantage of this downturn? Are there assets we can go out there and purchase? Other companies that might be distressed?
Folks are starting to look at that for the third quarter. I would say dipping the toes in. That is not where people are out making offers. They’re starting to dip their toes in and look for opportunities. The longer this goes on into past April 1, and into the second quarter, that horizon may extend into the fourth quarter, and that wouldn’t surprise me at all.
What we’re doing proactively in our businesses is all sorts of things around cash management. Cash is king. So right now, as you start to go into a downturn, everyone shifts the focus from growth to cash, and cash is king. Cash is what keeps you out of trouble … so that whenever the business market starts to turn around, you have the liquidity and the balance sheet to go out and make investments that will grow your business even more in the future.
Everyone today, from a tax perspective, is looking at what can I do right now and things I can think of for my clients to save cash, and that will get that cash in the door as quickly as possible?
Felix Lozano: I think there’s going to be a lot of businesses experiencing shortfalls in revenue and losses. What does that mean for next year? That means ‘Okay, so I’m coming out of a year where I had a downfall in revenue, a downfall in expenses. Lesser taxes were owed because I made less money in 2020,’ and that workflows into 2021 tax filings.
What you’ll see is an uptick in some work for us as a CPA profession, because, based on the tax stimulus plan that’s passed, there’s going to be some rules and regulations as to how to navigate those losses, and what’s eligible, and what can be taken immediately, and what other deductions that governments can allow to be taken immediately versus being phased in. And we’ve seen this in the past when you go through a recession.
In 2008 or 2009 when everything just kind of went south on us, there was a large influx of work the next couple of years to try to account for the losses.
When you’re making money, everybody feels good, and you’re paying taxes. It’s not a good feeling, because now you’re trying to work within the tax laws to account for the profits correctly. That’s no different than when you have losses. You’ve got to figure out how to account for the losses within the law and take advantage of what you can within the stimulus packages that are passed.