Five things for lawyers to know about tax planning during COVID-19

Five things for lawyers to know about tax planning during COVID-19

Nearly everyone has been impacted by COVID-19, from health worries, layoffs, cutbacks, reneged job offers, business and court closures, travel restrictions and more. And Zoom, of course. In fact, it's hard to think of anything in recent years that has been so big and so pervasive in just about every way. That's even true with your taxes. Here are five things every lawyer should know.

You always want to make a profit, and taxes are always measured annually. But to a limited extent, you can sometimes offset one year's profit with another year's loss. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was the first big federal relief law passed as a reaction to the coronavirus. The big overhaul tax bill passed at Christmas 2017 was called the Tax Cuts and Jobs Act, and it slashed the ability to claim net operating losses after 2017 to 80% of taxable income. What's more, the 2017 law took away your ability to carry net operating losses back to prior tax years.

Both of those changes hurt, especially the rule killing carrybacks. But as part of the COVID-19 response, the CARES Act helps in a big way. For tax years starting after Dec. 31, 2017 and before January 1, 2021 -- that's three calendar years of losses that you incurred in 2018, 2019 or 2020 -- the new law allows you to carry back 100% of these net operating losses to the prior five tax years. Losses that are carried back are carried to the earliest of the tax years to which the loss may be carried first.

You have to work out the mechanics of claiming these, but it's a sweet deal if you are in the sour position of having losses. How about net operating losses carryforwards? The CARES Act liberalizes those too, at least for time. Furthermore, for 2018, 2019 and 2020, corporate taxpayers can use net operating losses to fully offset their taxable income, rather than only 80% of taxable income. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the present 80% limit).

The CARES Act also brought businesses the Paycheck Protection Program, or PPP. It has been huge, and is the centerpiece of the government's relief for business. The PPP provides for up to $10 million in forgivable loans to cover employee payroll. There is also a tax credit, but you must pick one or the other so some comparison is needed.

You can use PPP money in any way you want, if you are willing to pay back the loan. But the key the PPP is the forgivable nature of the loans. If you want the government to forgive the loan so you don't have to ever pay it back, you need to comply with the restrictions. Plus, if you comply with the PPP rules and your loan is forgiven, it is not taxed. The loan really becomes a tax-free government grant.

Can you deduct wages you pay your employees with PPP money? Wages are usually deductible, but IRS Notice 2020-32 says you can't claim tax deductions, even for the wages, rent, etc. that are normally fully deductible. But Congress could reverse the IRS, saying that expenses funded with small business loans should be tax deductible after all.

The IRS says, you shouldn't be able to get the free money, not pay discharge of debt income, and still deduct the payments of wages and rent made with the free money. Yet there are good arguments for deductions too. And despite the IRS statement, some people have said they may try to deduct these expenses anyway and fight with the IRS about it if needed. And the tax law is sufficiently debatable that some of those taxpayers could win, too.

As an alternative to the PPP, the CARES Act provides a tax credit for employers to help them keep and afford their employees. Any employer, regardless of size, is eligible for the credit during calendar year 2020 if the business: (1) is fully or partially suspended due to a governmental order related to COVID-19, or (2) experiences a significant decline in gross receipts (i.e., a reduction of 50 percent of gross receipts from the same quarter in 2019).

The amount of qualified wages with respect to any employee for all calendar quarters in 2020 cannot exceed $10,000. In other words, there is a $5,000 total cap on the credit per employee for the 2020 tax year. Remember, the credit is not available to employers that received PPP loans.

The vast majority of tax rules, of course, are still there. There were tax filing extensions (April 15 this year became July 15), and a number of other changes. Near the start of the crisis, the IRS announces its Putting People First initiative, easing up on installment payments, levies and other actions until July 15. But with that date past, it is mostly business as usual at the IRS.

Even so, there will be many contexts, especially with IRS collection matters, where the impact of COVID-19 closures and cash problems are going to be felt for a long time to come. Even regular old audits are still impacted, with IRS supposedly giving more latitude in time and a hopefully slightly more understanding ear. But make no mistake, tax return filing deadlines, payment due dates, Form 1099 filing obligations, and the vast majority of IRS rules are still in place, and not going anywhere.

Thus, despite the various relief provisions Congress put in place -- and there hopefully will be some more of those to come -- don't forget about the panoply of tax issues we all have to deal with. Tax filing deadlines, for income tax and payroll tax, all carry penalties. And even if you can't pay, you should file on time to at least avoid the late filing penalties.

There are other penalties for failure to pay. And if you go silent, the IRS collection machinery is used to liens, levies and more. So if you owe, getting an installment agreement in place is always better than enforced collection. Tax returns are signed under penalties of perjury, and any tax issue can spiral out of control if it's not handled correctly. And remember, although criminal tax cases are rare, most criminal tax cases come out of regular old civil audits. So be careful out there! 