Estimated Tax Payment Consideration Under COVID-19

Business owners and individuals need to be actively planning for the economic impacts of the coronavirus (COVID-19) including the impact on cash flow.  Measures to provide tax relief and to support businesses by Federal, state and local tax jurisdictions to combat fears of COVID-19’s potential effects on people, businesses and the overall economy are being pursued.  President Donald Trump’s national emergency declaration gives the IRS the authority it needs to provide tax relief to businesses and individuals amid the spread of COVID-19.  Now the IRS can choose from a range of powers, including but not limited to abating penalties for failing to file or pay taxes, or postponing Federal tax filing and payment deadlines without interest or penalties accruing.  Treasury Secretary Mnuchin announced at a March 17, 2020 press briefing, Federal tax payments owed by individual taxpayers on April 15, 2020, may delay, without interest charges or penalty, paying up to one million dollars in taxes owed, until July 15, 2020.  Corporations may also delay paying, interest and penalty free, up to ten million dollars in taxes owed up to 90 days.

Maryland has announced that it will be granting businesses tax extensions for certain taxes.  Maryland said, “This extension will provide much needed relief to our business owners as they adjust to changes in consumer behavior, tourism trends and employee workforce output.”  The Maryland Comptroller’s office has stated that it would likely announce its corporate and individual income tax extension in the next week.  It is anticipated that the IRS will be unveiling specific plans, and that other states and the District of Columbia will also be unveiling plans in the immediate future.

Planning Ahead

One of the most immediate actions that can be taken, and which can have an immediate impact on cash flow, is to carefully and proactively engage in the planning of 2020 estimated tax payments.  Many owners of closely-held businesses, sole proprietorships and flow-through entities calculate and pay quarterly estimated payments by relying on the prior year safe harbor method.  This means that 2020 estimated payments will be based on the operating results of 2019.  Once this payment has been made, it is generally unrecoverable until the taxpayer files their 2020 tax return in 2021.  Let’s look at an example:

Ms. Smith, a dermatologist, owns 100 percent of an S Corporation in which she conducts her medical practice.  The S Corporation has been in a period of growth for the past few years, and Ms. Smith has been making estimated payments using the safe harbor method.  Under the safe harbor method, Ms. Smith will pay equal installments each quarter that will equal 110 percent of her prior year tax.

In 2019, the practice generated a $400,000 profit.  After considering wages from the S Corporation, other sources of income and items of deduction, Ms. Smith’s personal 2019 Federal tax liability was $120,000.  Ms. Smith had made Federal estimated payments during 2019 of $190,000.  Ms. Smith filed her 2019 tax return the first week of February and elected to apply $66,000 of the $70,000 refund due to her ($190,000 – $120,000 = $70,000) as two 2020 estimated payments.  The $66,000 application was made to cover her first two Federal estimated payments [($120,000 * 110 percent) / 4), as payments of $33,000 for each quarters 1 and 2.

Impact of Coronavirus on Business Operations

As a direct result of the coronavirus, the S Corporation began to experience significant patient cancellations as of mid-February 2020.  In response, Ms. Smith has taken proactive steps such as reducing expenses, rescheduling office hours, calculating various operating projections, reviewing and evaluating in-place contracts, and planning for additional disruptions and delays.  Based on the projections calculated by Ms. Smith’s CPA, it is estimated that the continued patient cancellations indicate that in a best-case scenario, the S Corporation will break even for the year.  Additionally, due to the overall impact on the economy, Ms. Smith anticipates that her other income will also be down for 2020.  As a result, Ms. Smith is projecting that the tax due will only be $5,000 for the 2020 tax year.

Unfortunately, since Ms. Smith has already filed her 2019 return, she has no way of reclaiming the $66,000 already applied to her estimated taxes until she files her 2020 income tax return in 2021.  As such, Ms. Smith will not be able to currently access and deploy those funds to continue business operations or cover personal expenses. 

Next Steps

Taxpayers who believe they are impacted by the current economic situation should strongly consider discussing potential ramifications with us to develop a strategy for calculation and payment of estimated taxes, which will achieve the dual objectives of meeting tax obligations and optimizing deployment of resources for the benefit of their company, their employees and themselves.  We will continue to provide updates concerning filing deadline extensions, payment of taxes, and other tax relief measures as official information is released.  To speak with a tax advisor, contact us today.

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