In March of 2020, at the cusp of tax season, the COVID-19 pandemic essentially decimated everything that could be predicted as to the forthcoming tax year.
With tax season on the horizon again, small and medium businesses are now looking to tax preparation providers for answers in what is arguably one of the most unconventional business years on record. Given the introduction of new circumstances, the Paycheck Protection Program, and changes at the local, state, and federal levels, this year presents a new obstacle course to navigate in a time like no other. According to a recent H&R Block study, only 28% of those surveyed felt they understood the financial or tax implications of receiving aid as a start of the COVID-19 pandemic, which makes things that much more challenging.
“It will be a multi-year journey back to normalcy,” said Jim Buffington, CPA, and advisory services leader at Intuit Accountants. “The pandemic disrupted tax season and thrust accountants into the role of economic stimulus advisors, which was a hard pivot for traditional firms. Combine that with the fact that many clients are experiencing health and financial hardships. Losing a business can be as heartbreaking as losing a loved one, and the financial devastation wrecks families, marriages, retirement plans, and emotional stability. Accountants are helping clients cope with challenges beyond tax and accounting.”
Even with these challenges, the 2020 tax season is not insurmountable, especially for firms that planned ahead. “We assembled a resource center to house emails, correspondence, and communication so that colleagues were able to keep up to speed on timely information,” said David Ogilvie, senior manager of the Enterprise Solutions Group at Kahn, Litwin, Renza. “The firm then created an external COVID-19 Resource Center to provide clients and friends of the firm with up-to-date information and guidance through articles, webinars and more.”
The pandemic also provided something of a kick in the pants towards the concept of filing a tax return remotely. “Fifteen years ago, e-filing tax returns became the standard, but most other workflows remained solidly on the desktop and physical documents. Now Zoom meetings have replaced in-person meetings, electronic document exchange and signature are the new standard, and QuickBooks Online is the new standard to replace desktop applications. Those workflows aren’t just safer in the COVID era, they automate more of the steps and dramatically improve productivity for firms and clients,” said Buffington. “Also, complex tax legislation and the enormous volume of stimulus dollars available, have highlighted the importance of engaging a trusted tax advisor who can help analyze the best combination of stimulus provisions for an owner’s situation.“
Ian Hardman, general manager and vice president of H&R Block’s small business division, offered the following tips:
- Money received from your forgivable PPP loan will not be included in your gross income at the federal level.
- You will need to check your state to determine if the forgiven loan will be taxable on your state tax return.
- You can deduct qualifying expenses paid with the proceeds of a forgiven PPP loan or emergency EIDL grants. Good news: This overrides previous IRS guidance.
- If you provided paid sick leave and paid family and medical leave in 2020, your employer tax credits can be extended through March 31, 2021.
- The employee retention tax credit is a refundable tax credit against certain employment taxes. The new bill extends and expands this credit.
- In addition, self-employed individuals can use their average daily self-employment income from 2019, rather than 2020, for purposes of computing the paid sick leave and paid family and medical leave credits.
Buffington offers following tax preparation tips that can help going forward:
- Leverage platform automation to create real time accounting and access mobile data for decision making, instead of waiting until books get cleaned up.
- Leverage cloud collaboration with your advisor to minimize the planning and compliance effort, while staying engaged and responding quickly to opportunities.
- Find an advisor who can help you architect cloud workflows to support remote employees and support contingency planning, instead of just tax compliance;
- Ask your advisor about tax planning opportunities, including amending prior tax and payroll returns where applicable, to claim stimulus credits.
As dire as things have been throughout the pandemic, they’ve shown just how inventive the American economy can be. The crisis forced business owners to reinvent how they delivered products, communicated internally, performed their work, and offered sales, service, and fulfillment to their customers.
Buffington expects more change is coming to businesses because of the pandemic. “New business creation always spikes after a recession, and this next generation of business owners will behave differently and have different expectations for their advisors,” said Buffington. “As an industry, we won’t return to the traditional desktop applications, manual workflows and in-person meetings. Which is good, because the mountain of tax compliance can and will continue to grow, and accountants will need the more efficient processes that remain after the pandemic.”
Even if your firm feels caught off guard by everything that’s happened since March 2020, it’s not alone. Everything changed overnight, and new rules, codes, guidance, and stipulations were put into place to keep things running during one of the most severe economic downturns since the Great Depression. The conventional wisdom is that this tax year, and the preparation for it, is an experiment in progress. The new rules, codes, and stipulations are something that are brand new to the tax preparation industry, so it’s unlikely a tax preparer can tell a small or medium business that these rules have been in place for decades and they should have known better.