As we approach the end of 2020, its time to think about the tax implications of a strange year. Staffing firms in particular face some unique issues that could create surprising tax bills.
Declining Revenue equals Declining AR
Is your revenue down significantly in 2020 from 2019? Not only are you making less in Net Income, there is also a good chance you’re A/R has decreased. Significantly lower A/R can cause a big Cash Basis Taxable Income increase and a corresponding tax bill.
Did you choose to defer ER FICA Taxes back in April as allowed under the CARES Act? (A wise decision in most cases that has drastically improved working capital for many firms). Keep in mind that this amount (hopefully accounted for correctly on your balance sheet) will be added back to your Cash Basis Taxable Income. Employer FICA was not part of the PPP program, so the deferral of payment is moving the expense to 2021 and 2022.
- While there is a chance the laws still change, as of now the funds you received from the PPP Loan will essentially be taxable once forgiven. Current guidance is that the expenses paid with PPP funds (primarily payroll for most firms) will not be deductible. Effectively the PPP Loan amount which is forgiven on will be picked up as Cash Basis Taxable Income.
How do you know what your exposure is on all of these items and what can you do to minimize it with the time left in Q4? We’ll cover that in our next BLOG post.
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