As we enter the sixth month of COVID-19 restrictions and lockdowns, a few things have become pretty clear: the economy is struggling, and so are taxpayers. Realizing that people — and, especially, small business owners — would need to stretch their money and make it last for some undetermined length of time, legislators across the country have responded with unprecedented stimulus measures (more on that here: https://www.l4sb.com/blog/a-tax-lawyer-weighs-in/), including pushing back tax filing and payment deadlines.
Here are just a few of the ways tax deadlines have been modified during the pandemic:
- On March 21, the Treasury Department extended the filing and payment deadline for 2019 personal income tax returns from April 15 to July 15, 2020. The State of New Mexico granted a similar extension, as did most other states.
- On April 09, the Treasury Department also extended the deadline for any other tax returns due between April 01, 2020 and July 15, 2020 to July 15, including the deadline for quarterly estimated payments.
- In the CARES Act, Congress allowed for a deferral of the employer’s portion of Social Security taxes for periods between March 27, 2020 and December 31, 2020, payable 50% on December 31, 2021 and 50% on December 31, 2022 — all without interest or penalties.
- New Mexico’s legislature enacted a deferral of personal, corporate, and fiduciary income tax payments, as well as certain payroll, gross receipts, and compensating taxes, to April 2021, provided the related tax returns were timely filed by the July 15, 2020 deadline.
This is just a small sampling of the deferrals and extensions granted by legislatures across the country to try to slow the economic damage resulting from COVID-19 and the public health measures adopted to combat it.
Just because you can doesn’t mean you should
Before deferring those tax payments and spending the money on other priorities, it’s worth considering the following:
1. Those taxes will still need to be paid
Deferring tax payments today is a bit like robbing Peter to pay Paul. That extra money you can keep and use today will have to be paid to the IRS or other tax authorities at some point over the next two years, depending on the deferral terms, and that money will need to be paid with earnings from your future — earnings you’ll also have to pay taxes on. This may change in the very unlikely event that legislatures choose to forgive these deferred taxes, but, for now, taxpayers must plan to pay these deferred taxes.
2. Things could still get worse
It goes without saying that the uncertainty around COVID-19 will continue for some time into the future. While there are certainly resources to help (see, for example, https://www.l4sb.com/blog/understanding-federal-unemployment-benefits-and-coronavirus/), one lingering uncertainty is whether the economy will continue to “reopen” or whether, in response to rising cases, the federal and state governments will reimpose some of the restrictions that have already been lifted. Not knowing what your financial situation will be in the future, it may be worth paying the taxes you owe now while you have the money in hand to do so — even if that means losing out on use of that money for other purposes.
3. If things get worse, those taxes might not be dischargeable in bankruptcy
There is a lot of confusion surrounding bankruptcy (for a breakdown of the different bankruptcy types, check out another L4SB article: https://www.l4sb.com/blog/the-b-word-how-to-use-bankruptcy-to-your-advantage/). One of the biggest misconceptions is that all debts go away after a bankruptcy. In many cases, debts are deemed “non-dischargeable” and survive the bankruptcy — meaning they still need to be repaid afterwards. Some taxes are automatically considered non-dischargeable. A common example is the “trust fund taxes” employers withhold from employee paychecks, such as employees’ income taxes and the employees’ portion of social security and Medicare taxes. Other taxes might be considered non-dischargeable for purely technical reasons, such as when tax returns aren’t filed or are filed late. If you think bankruptcy might be in your future (or your company’s future), you should consult with a qualified, licensed bankruptcy or tax attorney to discuss your options and tax obligations.
Not all taxes are covered
More important than knowing the taxes you can defer is knowing the taxes you can’t. Specifically for federal taxes, the income and FICA taxes withheld from employee paychecks, often referred to as trust fund taxes, must still be promptly reported and paid. Similarly, even though the employer portion of Medicare and Social Security taxes are usually reported and paid together, Congress only allowed a deferral of the employer’s portion of Social Security taxes — meaning the Medicare taxes must still be reported and paid, even if an employer chooses to defer Social Security taxes. As a general rule, unless a legislature or tax authority has specifically deferred a certain tax, you should plan to pay it as you normally would.
Confusing? Taxes usually are, which is why it’s so important to have a good tax attorney or tax accountant to make sure you’re looking out for your own short- and long-term best interests. If you have questions or want to talk about your situation, give us a call today. We’re here to help.
Law 4 Small Business, P.C. (L4SB). A little law now can save a lot later. A Slingshot company.