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Shift Your Clients’ Tax Plans by Helping Them Through a Disaster

If 2020 has taught us anything, it’s that the future is unpredictable. Natural disasters like fires, hurricanes and worldwide pandemics can upset even the most well-devised plan, and when basic assumptions about the economy, government and public health shift, plans must change to adapt to the new normal.

Whatever your clients’ tax plans were at the start of 2020, they have almost certainly changed by the end of it. But that’s ok. As their advisor, you are in a unique position to help them combat the effects of current disasters and more quickly acclimate to new ones that arise.

Prioritize Cash, But with Caution

The “cash is king” mantra can sound like a broken record, but it’s an often used saying for a reason. Additional cash can be the saving grace your clients seek during difficult times. But prioritizing cash in the short term often comes at a cost. If electing tax deferral now, your clients must recognize how those decisions will affect them down the road.

The Social Security payroll tax deposit deferral is a great example of such a conundrum. The Coronavirus Aid, Relief, and Economic Security (CARES) Act permits employers to retain their share of Social Security taxes that would otherwise be due between March 27, 2020 and December 31, 2020. Half of these deferred deposits must be repaid by the end of 2021, and the remaining half must be repaid by the end of 2022. Saving 6.2% on nine months of payroll can indeed provide employers with a surge of cash they desperately need, but unless there is a plan in place to repay those amounts, your clients may just be kicking the can down the road. If you and your clients anticipate that business will resume or pick back up in 2021, these payroll tax deferrals may be a great option. But if there is any chance the recession will affect their operations in the new year, they may want to consider other methods for retaining cash.

Focus on Compliance

Compliance extends beyond just tax returns. If your clients applied for and received government assistance, they likely need to prove they’ve complied with program requirements. Paycheck Protection Program (PPP) loans, for example, will generally be forgiven if the business can prove that:

  • Loan proceeds were used to pay for payroll costs, mortgage interest, rent, or utilities
  • They maintained full-time employee equivalent headcounts
  • Employee wages were reduced by no more than 25%
  • At least 60% of the amount seeking forgiveness was used for payroll costs

The forgiveness rules differ depending on the entity type, the type of workers the business employs, and the covered period they elected (eight weeks or 24 weeks). Fortunately, in early October, the Treasury Department and the U.S. Small Business Administration released a simplified loan forgiveness application for businesses that received $50,000 or less of PPP assistance. This new form will certainly make the forgiveness process easier – especially when combined with the most recent FAQ document that was published – but no aspects of the compliance burdens have been lifted; businesses using the simplified forgiveness application face the same compliance requirements as those using the full application. You should work with your clients to document their compliance with program requirements in case the Small Business Administration scrutinizes their participation.

Compliance should also be top of mind if your clients received an Economic Injury Disaster Loan (EIDL), state-funded relief, or business loans from local banks. Having all their ducks in a row will help your clients head into 2021 with confidence.

Explore New (and Discover Old) Credits

Your clients may be eligible for more tax credits than you think; certain tax credits were extended into 2020 that were set to expire in 2019, and new credits were created as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

Work Opportunity Tax Credit

The Work Opportunity Tax Credit (WOTC) was set to expire at the end of 2019 but was extended through 2020. This nonrefundable credit is awarded to businesses who hire individuals from groups that have traditionally faced barriers to employment like food stamp recipients, veterans, and ex-felons. Businesses can receive up to 25% of the eligible employee’s wages, or up to $9,600 total for each qualifying new hire.

Credit for Small Employer Health Insurance Premiums

Small businesses – those that average fewer than 25 full-time employees – may be eligible for a tax credit when they purchase their insurance through the Small Business Health Options Marketplace. Businesses can only take this credit for two consecutive years, so it’s important you help them determine the optimal time to file their claims.

Paid Leave Tax Credits

The CARES Act created new incentives for businesses that provide paid medical or family leave to workers impacted by the coronavirus. These credits are refundable, so they are especially beneficial to businesses whose operations have been stunted from the recession. The credit is calculated at 2/3 of the employee’s pay, but the specifics of each credit vary, so as your client’s advisor you will need to understand when paid leave qualifies as “paid sick leave” or “paid family leave.”

Energy Efficient Tax Incentives

Section 45L provides a $2,000 tax credit to contractors for each energy efficient home they build through the end of 2020. This credit is per dwelling unit, so contractors that have continued to build residential homes during the recession may be rewarded with a large tax credit come year-end. Section 179D is a similar incentive that gives a deduction to owners of new or existing buildings who make certain tax-efficient upgrades like new interior lighting or improved heating or cooling systems. This deduction is between $.60 and $1.80 per square foot of the affected buildings.

Look at Extended Payment and Filing Date Options

Victims of natural disasters are often relieved from federal tax filing burdens for a period after the disaster occurs. For example, victims of Hurricane Sally were given additional time to file and pay taxes that were originally due between September 14, 2020 and January 15, 2021. This includes income tax, payroll tax, excise tax, and others. The IRS keeps a comprehensive list of tax relief opportunities for disaster victims on their website. Though the taxes will come due eventually, your clients can receive a multi-month deferment of those taxes and can use that cash to shore up operational deficiencies in the interim.

Casualty losses may also be an option for your clients. In general, casualty losses for businesses are fully deductible as general business losses. But casualty losses are also available for individuals. Personal casualty losses are often the last tax relief to be considered because (1) potential losses must be reduced by insurance proceeds or any other reimbursement received, and (2) they are only deductible if the losses are attributable to a federally-declared disaster. Additionally, personal casualty losses must be claimed as itemized deductions, which means that individuals who do not itemize will see no benefit.

Adjust Expectations

Long-held assumptions about business operations may need to change. For example, businesses that typically see a spike in revenue during the holidays may not experience that same spike in 2020 or even 2021. Your clients should adjust their budgets and projections accordingly. As their advisor, you may want to run through different scenarios with them to prepare for all possible outcomes. If you have a dynamic tax planning software like the cloud tax and accounting software we designed at Corvee, you can run multiple different revenue scenarios to see how well your clients fare. As your client’s advisor, you can revise your client’s tax plans and help your clients be better chameleons; you can help them adapt to their new surroundings so that they can better position themselves to be successful in the future.

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