With all of the significant disruption to both our work and personal lives and an unpredictable end to the story as of yet, cash flow is probably one of the top three things on everyone’s mind. Tune in to any news program at any time of the day, and there’s no shortage of stories about the toll this public health crisis is taking on the economy and small to mid-sized businesses.
In times of financial uncertainty, business owners are faced with many difficult decisions about day-to-day survival, with cash flow being one of the biggest. There are so many potential programs available, it may not always be clear the right road to take for individual businesses due to the domino effect of implications from/to the supply chains and the viability of the intricate network of businesses on which we all rely to produce and deliver our goods and services.
As the federal and state governments are racing to address the tax concerns of the business community, we are seeing a lack in uniformity in the state and local responses, only adding to the anxiety of taxpayers. Adding to that confusion is the multitude of types of tax filings and tax payments businesses have to make—not just income tax but also sales tax, payroll tax, property tax and gross receipts taxes to name a few. Even without the impact of COVID-19, state and local tax due dates don’t always match federal ones.
One of the seemingly more appealing options being advanced is the opportunity to defer tax filings and the related tax payments. After the federal government allowed income tax payments due April 15, 2020 to be deferred until July 15, 2020, states are also providing their own version of relief, sometimes in the form of tax filing and payment deferral, and not always limited to income tax.
For example, Alabama has offered a program for certain qualifying businesses to be able to defer sales and use tax filings until June 1, 2020 if the business was unable to file its sales and use tax filings for February, March and April in a timely manner as a result of COVID-19. In such a situation, businesses considering deferring tax payments should proceed cautiously.
Here are some tips and considerations for managing tax filing and payment deferrals:
Organize Deadlines and Amounts Due
Since deadlines vary among federal, state and local jurisdictions, as well as among tax types covered by these types of programs, it is crucial to work with a tax advisor to create a tracking tool to manage due dates of tax filings and payments.
Understand What You are Getting Into
Read the fine print to make sure your business meets the criteria to defer payments and has taken the correct steps to provide your business with the benefits. Don’t assume participation is automatic.
Deferral Does Not Mean Dismissal
Have a plan for accumulating the cash needed to make the deferred payments. Taxes are ongoing, and just because a few payments can be deferred doesn’t mean future payments will be adjusted as well.
For example, second quarter estimates are generally due in the June/July timeframe. If you are deferring tax payments related to 2019, as well as quarterly estimates, you may run into future payment due dates in the same time frame as the deferred payment due dates, which will undoubtedly create another cash crunch.
Use Extreme Caution Deferring “Trust Fund Taxes”
Some types of taxes fall into the category of what are referred to as trust fund taxes. Monies collected from one party by an agent acting on behalf of a third party are considered trust fund taxes.
Payroll taxes and sales taxes are the most common trust taxes that business owners have responsibility for collecting from employees and customers respectively and remitting to a third party like the U.S. Treasury or a state department of revenue. Trust fund tax collections are not income and do not belong to the business owner. As such, there are generally significant penalties for non-remittance of collected monies under normal circumstances.
Furthermore, trust fund taxes continue to accumulate monthly and can become a large dollar amount quickly, which can get out of hand in terms of cash flow. Most notably, they are generally not dismissible during bankruptcy. At this time, only a few states have allowed non-income tax deferrals, including Alabama with respect to sales tax, but due to the nature of trust fund taxes, we do not anticipate widespread adoption of deferrals for these taxes.
Communicate, Communicate, Communicate
Communicate with your tax advisors and the jurisdictions! Even if a state or locality does not provide a formal method of tax return or payment deferrals, if you need relief, contact the jurisdiction to ask if there is informal assistance available and how to access it.
Persistence may be the key here, as many jurisdictions are operating remotely, like many of us are doing now. And if you do set up an arrangement with a jurisdiction, communicate with your tax advisors concerning what those arrangements are going to be.
Connect with an Advisor for Assistance
It’s an overwhelming experience for all of us in these unprecedented times, but Warren Averett is working hard to continue to provide sound financial advice as developments occur. Contact your Warren Averett tax advisors (or have a member of our team reach out to you) if you have questions or if you need assistance with this matter or any others to meet your business needs.