This time of year, we businesspeople are typically working on next year’s budget and year-end tax planning. During December 2020, most of us are adding Covid concerns and PPP Loan Forgiveness to our usual year-end list. Let’s briefly talk about each of these items.
Budgets
While Covid brought a whole new world for many, and financial devastation to some businesses, most of the clients and others I know of did not suffer much. 2020 was a reasonably good year and the PPP Loans were a gift. Based on that, most are budgeting modest improvement for 2021. Modest, because who knows how circumstances will play out? Rather than a static 12-month budget, you might want to consider 18-month rolling budgets. With this approach, you’re always out 18 months, with quarterly reforecasts. Given the uncertainty we face, this approach seems particularly appropriate right now.
Year-End Tax Planning
With the change in presidential administrations, and the outlandish deficits the country has been running, it seems that tax rates can only go one direction and that is up. How much and how soon are not clear. It seems the Section 199A Qualified Business Income (QBI) 20 percent deduction for pass-through entities is likely the first thing to go, and that could be a soon as 2021. With that assumption, 2020 tax rates could be lower than 2021 tax rates. That means that we should reverse our usual tax planning strategies. Rather than accelerating expenses, we may want to defer expenses into next year. And for revenue, we may want to accelerate revenue into 2020, if we’re able.
PPP Loan Forgiveness
For all the problems with the PPP Loan program, I’ve got to say that the early indications on the forgiveness process are positive. These loans have been split into three groups: those under $50,000 (which get a streamlined process), those over $2M (who need to justify the necessity of their loans) and those in between.
My business’s PPP loan was under $50,000. I received approval from my bank about two hours after initial input. I received SBA full forgiveness four business days later. A client’s loan of over $1M took a month with their bank to get all the documentation in order. But after submission to the SBA, they got full forgiveness in three business days. The loans over $2M are likely to get more scrutiny. We’ll see that the turnaround time is on those. So far, so good.
The taxability of these loans has been reinforced by the IRS and Treasury. Changing that will take, well, an Act of Congress, so I wouldn’t count on it. The IRS has also reaffirmed that if the taxpayer should expect forgiveness, then the year of taxability is 2020. That holds true even if the taxpayer has not even applied for forgiveness before the end of 2020. Consider this as part of your year-end tax planning. A lot of us are going to owe a bunch of tax for 2020.
Covid Concerns
The good news is the vaccines are coming. The bad news is, it is going to take some time and 2021 is going to be much like 2020. Be patient and stay the course.
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