Where is the finish line?
I am a runner and my talent is in the long run versus the sprint. Sprinters have fast twitch muscle fibers to help them power through a stressful but fast race. Marathon runners have to go the distance so they use less energy at a given speed so that they can make it to the finish line.
As tax professionals, most years we have to sprint in March and April to get through the crazy tax season and file by April 15. This year, in the middle of the tax season sprint the Treasury Department and the IRS announced that the date for filing business and individual tax returns was automatically extended from April 15, 2020 to July 15, 2020. Suddenly we all switched from a sprint to a marathon. Now we are heading to the new finish line of July 15 and some big tax payments are going to be due.
The later tax filing deadline was good news for tax preparers, individuals and business owners. It gave us more time to plan and prepare for the tax burden on 2019 returns as well as the 2020 year. Many business owners had a very good year in 2019, but they were suddenly very worried about the 2020 financial picture. The problem is that there are only a few things you can do at this time to reduce the 2019 tax burden, and at some point those taxes are going to be due and payable to the IRS.
Tax payments that are usually due on April 15 were extended to July 15. This included the taxes due on your 2019 return and the first quarterly estimated tax payment for 2020. Now that we are getting close to July 15, some taxpayers are having to pay some large payments to the IRS. This comes at a time when business owners are very worried about cash flow and business continuity.
As this day of reckoning is coming close, several groups, including the National Taxpayers Union and the National Treasury Employees Union, have asked the IRS to extend the tax due date again. The goal of this second delay would be to inject new liquidity into the economy by delaying these tax payments. This relief would mean that the IRS is giving interest-free loans to individuals and companies that owe the government money.
This may sound like a good plan for businesses and individuals who have been affected by the pandemic. It allows them to keep cash for current working capital needs. The danger to this strategy is that these taxes will eventually be due and the IRS is a terrible lender. They have power to seize assets and garnish accounts if you don’t pay on time, the loan terms are not very good!
We advise clients to make the 2019 tax payments sooner than later. The first goal is to reduce the tax burden on 2019 income as much as possible but it doesn’t help a taxpayer to spend the government’s money on current working capital. That can get you into even more trouble. Pushing the tax deadline even farther will put business owners in jeopardy of not having the funds when the taxes are eventually due.
We work with clients to put a strategy in place early and keep more profit. If you have a good plan in place, the cash to pay taxes should be available and then you can plan for the next year. While it’s almost too late for 2019, there’s plenty of time to get ahead for 2020. Breakaway can help keep your books in order and strategize for the future.