YOUNGSTOWN, Ohio – If there’s one word accountants have had running through their heads, whether looking over the past months or into the upcoming tax season, that word is “uncertainty.”
Among the chief concerns have been the availability of Paycheck Protection Program loans in April, cash flow during the summer or, now, the outcome of the presidential election and the tax implications of those PPP loans awarded what seems so long ago.
“The biggest commonality among everyone is uncertainty. It’s been an interesting mixture because half of our client base is busy because for whatever reason COVID has impacted their business positively or not as much as expected,” says Tim Petrey, managing partner at HD Davis CPAs, Liberty. “On the other side, people are shut down completely. Both situations are surrounded by some level of uncertainty. The people who are busy know it won’t last forever and the people who aren’t busy also know that.”
Since the federal coronavirus relief bill was passed at the tail end of March, the biggest questions clients have surround the Paycheck Protection Program. As businesses have had their loans awarded for months and are now into the forgiveness phases, the program still has tax implications that companies need to plan for.
While the language of the law says PPP loans are nontaxable income, current tax law states expenses generated by such income are taxable, essentially making the loans taxable – regardless of whether they are forgiven, in which case they are deemed taxable income. But, should they be forgiven, the expenses the loan was to be used for such as rent or payroll are taxable.
“When we talk to people about 2020 taxes, we have to take into consideration what may happen if those expenses are nondeductible. They may end up with larger tax bills. I don’t think that was congressional intent and I don’t think that’s what they want the result to be,” says Nick Demetrios, principal of the tax advisory group at HBK CPAs & Consultants, Canfield. He points out that changing the law would require an act of Congress, not a decision by the IRS, Treasury or U.S. Small Business Administration.
Regardless of how the tax implications play out, area accountants agree that the PPP loans, as well as the larger relief bill that created it, were a much-needed lifeline that helped businesses weather the early days of uncertainty during the pandemic.
“Our main concern among partners here and senior management has been making sure they’re all in line to get [PPP] funding because everything’s uncertain,” says Lisa Loychik, partner at Cohen & Co. in Youngstown. “We had clients take advantage of a technical correction in the Cares Act related to qualified improvement properties, where real estate owners could get a bonus depreciation deduction for improvements they put in.”
The relief bill also loosened restrictions on carrybacks for net operating losses. This provided a five-year carryback for losses in 2018, 2019 and 2020, suspended the limit capping net operating loss carrybacks at 80% of taxable income and allowed owners of pass-through businesses to use net operating losses to offset nonbusiness income above $250,000 for single filers and $500,000 for joint filers.
Beyond just the questions surrounding how PPP loans will be taxed, the presidential election – an event that even in a normal year would have accountants preparing two tax plans – is adding an extra layer of uncertainty. At press time, with a massive number of mail-in ballots delaying final results in some states and almost-certain legal challenges over the tallies, accountants have to help their clients through year-end planning with an added degree of difficulty.
What helps, however, is that both presidential candidates have laid out their tax plans. Should he win re-election, President Donald Trump will likely follow the same course he has over the past four years.
“If Trump gets in again, he’s going to preserve and make permanent the changes that were implemented by the Tax Cuts & Jobs Act,” Loychik says. “There were a number of favorable temporary tax breaks for individuals and families that will expire at the end of 2025, which he wants to make permanent.”
Demetrios adds there could also be some additions to the Opportunity Zones program under a second term for Trump, an initiative that Democratic nominee Joe Biden would revamp. The biggest changes under Biden’s tax plan is the increase of the marginal tax rate to 39.6% on earnings over $400,000.
“I’d say there’s a fairly broad concern that if Biden were to become president and the Democrats take control of the House and Senate, that tax rates would go up,” says John Cournan, principal at Packer Thomas, Canfield. “There are a lot of folks questioning, say they’re going to sell a building, if it makes more sense to do it this year or next year. If they do it next year, the tax rate might be higher. They may have more time to pay taxes [next year]. If they sell now, they have to pay now but at a lower rate.”
At press time, those concerns were somewhat mitigated with Republicans appearing to hold on to control of the Senate.
Still, higher taxes on businesses under a Biden presidency also make the calculations over when to file for PPP forgiveness more complicated, Cournan adds, as a similar situation could play out over at what rate the loans are effectively taxed at.
“If you’re having an already good year and your tax rates are lower this year, there’s a feeling rates will go up in 2021 under a Biden presidency. Maybe it makes sense to accelerate the process for PPP forgiveness,” he says.
HD Davis’ Petrey, however, adds the caveat that without support from both the House and Senate, effecting wide-ranging tax changes will be an uphill battle for Biden.
“It’s hard to say it’s the president alone. It’s very clear that Biden, if he doesn’t have the support of Congress to do that, it’ll be tough,” he says.
Even as curveballs were coming at businesses from every direction in 2020, there were still the usual tasks to take care of. To maintain their financial well being, Cournan says most of his clients went into “hunker down mode” and conserved money when they could. That often means delaying major investments, whether equipment, hiring or acquisitions.
“Projects got put on hold. To say how long those will be put off, I don’t know. But I’ve definitely seen deals – mergers or transactions – that were to take place put on hold. People played it cautiously this year,” Cohen & Co.’s Loychik says.
When those projects will be resumed is anyone’s guess and relies on myriad factors – when the pandemic subsides, when businesses are comfortable again, if the market for such investments is there and many other questions that need to be answered.
Even in business sectors able to remain open through the summer, such as manufacturers, Demetrios says there may be a slowdown in the future.
“One thing we’re seeing now from manufacturing is that the sector sustained a little bit over the summer because things had been booming. There were back orders and other things to work on. Going into quarter four and the first quarter of 2021, that isn’t there,” he says. “There’s a lot of uncertainty.”
But whether business is strong or simply creeping along, Petrey advises against making changes that are too drastic.
“For the guys who are really busy, we want to use this as a platform to survive a potential downturn a year from now,” he says. “For larger clients that have had some exposure to industries that were hit hardest, we looked at how they could reduce their labor force or change the way they’re doing things. A lot of it is just making wise decisions about how to get skinny. There are plenty of things you can do that may hurt your business for years to come, as opposed to getting skinny intelligently.”