Although cash flow may appear to be growing, expenditures will also be extended for future government liabilities.
COVID-19 has created a unique environment not only for independent grocers but for businesses across industries. Independents have done an excellent job serving their communities and ensuring a safe environment for their employees and customers. As the world looks forward to a vaccine and a return to some semblance of normal, many retailers are conscious that the post-COVID way of life is coming to an end. Planning needs to extend beyond just labor supply, inventory, and pay; cash flow is also critical.
As cash may appear to be growing during this time, outflows will be extended for future government liabilities. These are three main points to take into account when tax planning for next year:
The deferral of FICA by the presidential order (IRC §7508A).
If you deferred your employer portion of FICA for the period September 1 thru December 31, you have pushed your cash payment into 2021. However, you will have to make the 2020 deferred payments and typical future FICA payments; unless the government forgives this payment. Keep this in mind when looking at your future cash needs. While it is not an extra amount, with the deferral, don’t lose sight of your committed cash in your bank account.
The Paycheck Protection Program (PPP) loan forgiveness.
The expenses paid for using the PPP loan, if forgiven, will not be tax-deductible. For example, if you received a $1M loan forgiveness to apply against expenses, you have essentially created $1M in taxable income. The expenses are not deductible and, therefore, will add to your bottom line. If you have a 20% tax rate, you will have a $200,000 tax liability.
Most business owners pay estimated taxes based on the prior year. Therefore, planning for the additional tax expenses next year is essential.
Estimating tax payments and potential cash expenditures
For 2019, you most likely paid taxes and were required to pay estimates in 2020. Most years, your taxes come out plus or minus against the four quarters of estimated tax payments. With increased sales and profits come increased taxes. It would be best if you kept this in mind when looking at your cash requirements in 2021.
Items two and three present you with some tax planning opportunities. Capital expenditures that would have taken place next year may be better pushed forward. However, as with any planning, there are always complications. This year is an election year. There is a possibility of a tax increase on corporations or removal of other deductions by the Biden administration. Which may influence many business owners’ decisions. The timing of that decision may have real financial impacts on the future of the business.
You may need time for specific CAPEX projects to complete them before the tax year-end (i.e., order times, installation, and others). If Biden wins and there is a Democrat Senate, it could make sense to let those projects fall into next year if you fear higher rates in 2021. If the election favors Trump or the Republicans hold the Senate, you may desire to reduce the current year taxes as rates will be unlikely to increase in 2021.
In summary, begin planning what your cash outflows will be, so you ensure the cash on hand to pay income taxes and FICA delayed payments are available and do not impact your operating decisions in 2021. Also, you may want to consider reaching out to your tax professional right away to ensure time to enact a plan to reduce income taxes.