With the passage of the CAA in late December 2020 and the talk of additional pending legislation that appears to be heading our way, it will be another crazy income tax preparation season for many CPAs.
Until the late December legislation, many CPAs had already been planning how their client’s income tax returns would be prepared under existing law, whether the returns were C-corps, S-corps, partnerships, or individual income tax returns. However, since the passage of the CAA in late December, we’ve seen nothing but curveballs.
Do not be surprised if your CPA recommends extending your business and personal returns this year until all the legislative dust settles. Please do not be angry with them for that recommendation either. I know many taxpayers are leery of extending income tax returns for various reasons; however, in the legislative climate we are currently in, it is likely an excellent recommendation.
Here are some reasons why it may make sense to extend your income tax returns this year:
- CAA made sure forgiven PPP loans would be completely income tax-free at the federal level; however, what position has your state taken? How are they going to handle forgiven PPP loans? In many states, we do not know as yet.
- How will the tax-free income from forgiven PPP loans be reported on your income tax return? How will it flow to the owners of the various pass-thru entities (PTEs)? How will it be reflected on the business’s balance sheet?
- CAA opened the door for those who received PPP loans to potentially benefit from the Employee Retention Credit (ERC). Many taxpayers may not know if they are eligible by the tax return filing date, and even if they do know, many may not know the extent of the benefit and the best way to claim the benefit. Then there is the treatment of a tax credit on a business income tax return and how it could impact your wage deduction.
- When your CPA is determining your eligibility for the ERC, they will also have to consider how it interacts with your PPP loan forgiveness application and whether you have received forgiveness or not. They will also have to consider how the ERC interacts with any wages used to claim the tax credit for sick pay under the FFCRA legislation passed in March 2020.
- Since CAA, how has your state responded? Are they developing their own stimulus legislation like Maryland just did? Maryland just passed legislation that will impact 2020 income tax filings, and they have already asked their residents to be patient while they revise their income tax forms. We suspect many states will likely follow suit.
These are just five examples of why rushing to prepare and file a timely income tax return may not be the most prudent course of action. There are many pieces to this puzzle,and many of us are still looking for some of those puzzle pieces.
We say be patient with your CPA and let them complete the puzzle for you BEFORE filing your income tax returns, so they only have to be filed once.
Author: Tim Lott
Tim Lott, CPA, CVA, has decades of experience working with dentists at all stages of their careers. He is a regular speaker at study clubs, societies, and dental schools. Tim is a frequent participant and a moderator of Dentaltown.com. You can reach Tim at email@example.com or any of the other dental partners/principals at (800)772-1065 or firstname.lastname@example.org