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Column: Retailers Need To Cash And Tax Plan Now

FMS Solutions
Tatyana Levy

by Tatyana Levy, CFO of FMS Solutions Holdings

COVID-19 has created an interesting environment for the independent grocer and the world. Independents have done an excellent job serving their communities and insuring a safe environment for their employees and customers alike. 

As we look forward to a vaccine and a return to normal, retailers may think the end of the unusual way of life is near. With that, retailers may be starting to plan stepping back any bonus pay implemented during COVID or beginning to adjust labor levels as sales spikes have decreased.  However, the planning needs to extend beyond just labor supply, inventory and pay and be forward thinking to cashflows.

There are three main points to plan for, as cash may appear to be growing during this time, but outflows will be large when it comes to future government liabilities.

The first item is the deferral of FICA, by presidential order (IRC §7508A). If you deferred your employer portion of FICA for the period Sept. 1 thru Dec. 31, you have pushed your cash payment forward into the future. However, unless the government forgives this payment, you will have to make the 2020 deferred payments along with you normal future FICA payment. You should keep this in mind when looking at your future cash needs. 

While it is not an extra amount, with the deferral, don’t lose sight of your committed cash in your bank account.

The second item is PPP loan forgiveness. The expenses that were paid for using the PPP loan, if forgiven, will not be tax deductible. That means if you received a $1,000,000 loan forgiveness to apply against expenses, you have essentially created $1,000,000 in taxable income (the expenses are not deductible and therefore will add to your bottom line.)

If you have a 20 percent tax rate, you will have a $200,000 tax liability created in this example. Because most business owners pay estimated taxes based on the prior year, you should plan for the additional tax expense next year. 

The third issue also relates around estimated tax payments and potential cash outflows. For 2019, you most likely paid taxes and were required to pay estimates in 2020. Most years, your taxes come out plus or minus against the four quarters of estimated tax payments.

With increased sales and profits come increased taxes.  You need to keep this in mind when looking at your cash requirements in 2021.

Items two and three present you with some tax planning opportunities. Capital expenditures that would have taken place next year may be better pushed forward into 2020.  However, as with any planning, there are always complications. This is an election year. The possibility of a Biden administration tax increase on corporations or the removal of other deductions that benefit pass-thru entities may influence your decision. The timing of your decision may have real financial impacts to you and your business. 

You may need time for certain capex projects to complete them before the tax year end (i.e. order times, installation etc.). If the election is decided in favor of Biden and the Democrats in the senate, then it may make sense to let those projects fall into next year if you fear higher rates in 2021.  If the election is in favor of Trump or the Republicans hold the senate, you may desire to reduce the current year taxes as rates will be unlikely to increase in 2021. 

In summary, begin planning what your cash outflows will be, so you ensure the cash on hand to pay income taxes and FICA delayed payments is available and does not impact your operating decisions in 2021. Secondly, you may want to consider reaching out to your tax professional right away to ensure time to enact a plan to reduce income taxes.

Levy is a CPA licensed in Pennsylvania and is a graduate of Temple University Fox School of business. Her background includes both private equity and public accounting with HIG Capital and Deloitte respectively.  She may be reached at [email protected] for questions.

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