Public Companies: Act Now on 2020 Tax Planning
Public companies often have an internal finance department, but not a tax department, and at year-end several tax issues need attention. Without specialized tax expertise, organizations risk missing out on favorable tax planning – and 2020 planning will be even more complex than usual.
If you don’t have an in-house tax team, speak with your tax advisor as soon as possible about any issues that you may need to address before December 31st. Remember to tell your tax professional if you have taken advantage of any provisions in the Coronavirus Aid, Relief and Economic Security (CARES) Act, the Families First Coronavirus Response Act or any other aid or relief packages.
Top priority: ASC 740, accounting for income taxes
Complying with ASC 740 – which governs accounting for income taxes and requires businesses to analyze and disclose income tax risks – is one of the most complex tax challenges public companies face. Not only does it involve significant tax and financial reporting requirements, particularly for companies without an internal tax department, but it has also become one of the top areas of focus for the U.S. Securities and Exchange Commission (SEC). Furthermore, ASC 740 mistakes can result in restating financial statements – among a CFO’s worst nightmares.
You can learn more about ASC 740 in this Kaufman Rossin FAQ, but here are some important points:
- ASC 740 provides a way to recognize a company’s income tax expense for financial reporting under U.S. generally accepted accounting principles (GAAP) by measuring the differences between the tax bases of assets and liabilities and the carrying amounts of assets and liabilities recognized for financial reporting. ASC 740 also provides standards for measuring, recognizing and reporting uncertain tax positions.
- Accounting for income taxes is more complex for public companies because of the tax internal control requirements of the Sarbanes-Oxley Act of 2002. Controls around accounting for income taxes have been a source of material weakness in many public companies that have led to the restatement of their financial statements.
- If you don’t have an internal tax department, a tax provider can calculate and prepare your global income tax provision, analyze uncertain tax positions and prepare the related footnote disclosures in the company’s financial statements so they can withstand the scrutiny of outside auditors.
CARES Act implications for public companies
The 880-page CARES Act is teeming with provisions to help public companies weather the pandemic, but it is also making 2020 tax planning more complicated. Several CARES Act provisions provide retroactive tax relief, so you may want to consider filing amended 2018 and 2019 returns, if you haven’t already.
Some key points and potential action items to keep in mind:
- You may be able to take larger deductions for net operating losses (NOLs). The Tax Cuts and Jobs Act of 2017 had stopped the carryback of NOLs that exceeded taxable income within a particular year. It also imposed an 80% of taxable income limitation on the use of NOLs arising in tax years beginning with 2018. The CARES Act grants a five-year carryback period for NOLs arising in tax years beginning January 1, 2018, and ending December 31, 2020. It also temporarily suspends the 80% of taxable income limitation on the use of NOLs, allowing taxpayers to fully offset taxable income during the allowed tax years, regardless of when the NOL was generated.It may make sense for your company to take advantage of the carryback by amending or modifying tax returns for tax years dating as far back as 2013.
- Qualified improvement property (QIP) is eligible for 100% bonus depreciation. Most non-structural improvements you make to the interior of a non-residential building are considered QIP. The CARES Act fixed a Congressional oversight, and QIP is now back to being classified as having a 15-year depreciation (rather than a 39-year period). In addition to the shorter cost-recovery period, this also allows new QIP to be eligible for 100% bonus depreciation.
These changes apply retroactively to property acquired and placed in service after December 31, 2017, and include tax year 2020. You may want to amend or refile your 2018 and 2019 taxes (if you haven’t already) to claim the extra depreciation you would have been able to claim if these provisions had been in place for those tax years.
- The business interest expense deduction has increased. The Internal Revenue Code’s Section 163(j) limitation on allowable deductions for business interest expense has been increased to 50% of adjusted taxable income, for both 2019 and 2020 (after a reduction to 30% beginning in 2018). This CARES Act provision also allows the use of 2019’s adjusted taxable income to calculate the limitation for 2020. That 30% limit returns for 2021.
You may want to consider changes to your capital strategy in light of this temporary increase in the business interest expense deduction.
Consider pandemic-relief credits before depositing payroll taxes
- If you didn’t receive a Paycheck Protection Program (PPP) loan, consider whether you qualify for the CARES Act employee retention credit. This is a payroll tax credit of up to $5,000 per employee for employers that had to suspend operations due to COVID-19-related government orders or experienced a significant decline in gross receipts.
- If your business employs fewer than 500 people, you may be able to claim a payroll tax credit for employees who took mandated paid medical leave to quarantine or care for family members due to COVID-19. This payroll credit applies to your gross income for this year.
- The CARES Act allows employers to defer deposit and payment of their share of Social Security taxes due for the tax periods running from March 27, 2020, through December 31, 2020, with no penalties. Even if you haven’t taken advantage of this provision yet, you may still be able to do so. In some cases, you may even be able to re-categorize previous deposits to defer additional Social Security taxes. You will need to report these deferrals on your employment tax return and, of course, you will need to pay the taxes within appropriate deadlines.
Consider when to apply for PPP loan forgiveness
PPP loans introduce new tax considerations for companies that participated in the program. As it stands right now, Paycheck Protection Program loans that are forgiven will not count as taxable income, but businesses also cannot deduct any expenses paid with those funds.
If you haven’t already, talk with your tax and financial advisors about the best PPP loan forgiveness strategy for your business. Some businesses should apply for loan forgiveness as soon as they’ve spent the funds. Others may benefit from waiting for more clarification on forgiveness, either from their lender, from the U.S. Small Business Association (SBA) or from Congress. The SBA maintains a current FAQ on PPP loan forgiveness.
Loan and lease modifications
If you obtained loan or lease modifications to help with cash flow this year, you may have accounting, financial and tax implications to consider. Seemingly minor changes to covenants, agreed-upon payment delays, term expansions, agreements to set aside or ignore certain covenant provisions – any one of these may affect GAAP accounting or taxes. This includes traditional loans, lines of credit and other financing, as well as equipment leases and commercial property rents.
This area of finance and tax is complicated, so share this information with your finance, accounting and tax advisors – even if you think it may not be relevant. They can help you determine what needs to be reported and what the impact will be.
State and local tax impacts of the pandemic and relief efforts
Companies that moved their operations in response to the pandemic, that have employees working from home in states other than where their offices are located or that saw significant shifts in where their sales occur may have new state and local tax implications to consider.
Businesses with employees who worked from home in other states for part of this year due to COVID-19 may have nexus in that state. This means you may have taxable income that must be apportioned to that state and need to file state tax returns, possibly where you haven’t done so in the past. You may also not have paid required estimated state taxes in those states.
Even if this isn’t a new tax filing state for your business, these work-from-home employees may increase the apportionment of income that is subject to that state’s taxes. A handful of states have issued guidance that employees in their states who are working from home only because of the pandemic will not impact nexus or the apportionment formula. Most states, however, haven’t issued any such guidance. Expect your telecommuters to impact nexus and apportionment in those states.
In addition, some states have adopted CARES Act provisions into their own tax codes, but not all have. So CARES Act-related tax relief may not apply to state tax codes.
Consult with your tax advisor for current information about how it affects your business.
M&A transaction tax planning
If you are considering any merger or acquisition (M&A) activity in the coming months, check with a tax professional. It’s best to have those conversations ahead of a significant transaction or acquisition – whether it is of a company, a branch or a subsidiary – to understand the tax implications. Do not wait until after you’ve completed the deal; it might be too late to structure the deal in a way that is tax advantageous.
Election year uncertainty
Looking ahead, it may make sense to engage in scenario planning for possible 2021 tax changes. If you want to make any immediate changes based on the results of the election, you will only have a few weeks left in 2020 to do so.
Remember, as we enter the final stretch of 2020…
Don’t forget to check in with your tax advisor before year-end so you can decide whether to make any adjustments or take action for tax planning purposes or if any financial statements need to be updated to account for tax-related decisions. Be transparent with your tax professional, sharing openly so your advisor can help you determine what is relevant. What might seem like a trivial change could in fact be something that needs to be accounted for.
Contact your Kaufman Rossin tax advisor to learn more about what you can do now to minimize your 2020 tax bill and prepare for 2021.