As we near summer 2021, more companies have resumed normal (or near-normal) operations and more employees have returned to work. Many aspects of 2021 seem brighter than 2020 – but the 2021 tax return season is not one of them. For many companies, the 2021 tax return season is a rat’s nest that scares them.
The federal tax filing season began on February 12, 2021, about two weeks later than usual. With the country still affected by the Covid-19 pandemic, many expected the IRS to extend deadlines for filing and paying federal taxes, as it did in 2020 (when most deadlines for filing of tax returns and payments has been postponed to July 15, 2020).
“Many companies continue to grapple with the economic impact of Covid-19, as well as significant changes in the way (and where) employees do their jobs. This, coupled with the various changes in tax law, changes in tax filing and payment due dates, and anticipation of future tax law changes, creates frustration for businesses with the added administrative burden, ”said Brian Carey, CPA, senior tax manager at Crowe LLP.
Around the same time the filing season began, severe winter storms wreaked havoc in several states. In response, the IRS extended the filing and payment deadlines for businesses and individuals in Texas, Louisiana, and Oklahoma to June 15, 2021.
Those in other states waited until the end of March for the extension to be announced. With the deadline fast approaching, many assumed the extension would never come. Finally, on March 17, 2021, the IRS announced the extension. For many companies, however, it was more fizzy than sizzle. Individual taxpayers automatically have until May 17, 2021 to complete their 2020 federal income tax filing and pay their 2020 federal income tax. That’s it. The estimated taxes and corporate income tax returns for the first quarter of 2021 were still due on April 15, 2021. In many states, state taxes for individuals were still due on April 15, 2021.
What the extended deadline for filing taxes means for businesses
At first glance, it may not be clear how the extended deadline for filing taxes until 2021 will affect businesses. The March 15 deadline continues to apply to S companies and partnerships. The April 15 deadline continues to apply to C companies. However, most US businesses are made up of self-employed workers or the underlying owners of businesses that are treated as flow-through businesses for tax purposes. These taxpayers make estimated tax payments each calendar quarter. Although the filing deadline for these taxpayers is extended to May 17, 2021, they must submit their estimated tax payments for the first quarter by April 15, 2021.
Business groups and CPAs complained that not moving the deadline for estimated payments in the first quarter of 2021 would hurt small businesses and the self-employed, many of whom have suffered the worst of the pandemic. For a while, it seemed that these complaints were gaining momentum.
On April 8, Rep. Lloyd Smucker (R-Pa.) Introduced Bill (HR 2437) to extend the due date for the estimated tax payment in the first quarter of 2021 to May 17, 2021. and (at the time of this writing) Rep. Smucker’s bill is still in the first phase. Despite all the excitement, the IRS appears to have remained stable. On April 13, 2021, IRS Commissioner Rettig testified to the Senate Finance Committee that expanding the scope of the extension would “pose a significant potential risk to the law’s implementation [American Rescue Plan Act]. “Commissioner Rettig noted that this” could further delay the delivery of Recovery Rebate Credits (RRCs) and the third round of EIPs, as well as reimbursements – including EITC and CTC payments – to the most vulnerable Americans. “
Tax return challenges
With companies and their advisors struggling to meet the 2021 filing and payment deadlines, they face many challenges in the 2021 tax return season. The challenges include, but are not limited to:
- Interpretation of the Covid-19 auxiliary provisions: Businesses may struggle to accurately report items related to the Covid-19 auxiliary regulations issued last year. They may have to take positions with little or no official guidance. Previously issued guidelines may later be found out of date. For example, the original position of the IRS was that taxpayers were not allowed to deduct expenses that would otherwise be deductible if payment of the expenses were likely to result in the issuance of a PPP loan under CARES. This starting position has put taxpayers in a difficult position. On January 6, 2021, in Revenue Ruling 2021-2, the IRS declared its previous guidance obsolete and took the opposite position. In other words, a large number of previously non-deductible expenses from 2020 are now deductible.
- Calculation of quarterly estimated tax payments: As mentioned above, many businesses and their owners pay estimated quarterly taxes. For 2021, the first quarterly payment was due on April 15, 2021. Taxpayers typically use last year’s taxable income to forecast income and estimate their quarterly payments. However, 2020 was an unusual year, so using these numbers may not help. If the forecast for 2021 income is too high, it will result in an overpayment, which will reduce cash flow for many companies with liquidity shortages. If the forecast for 2020 is too low, there may be an underpayment penalty.
- Additionally, some individual taxpayers chose to overpay last year’s federal income tax and apply the overpayment to their first quarterly estimated tax payment for 2021. Until the IRS recently issued guidance on the matter, taxpayers were faced with uncertainty as to whether the IRS would treat the overpayment as paid on May 17th despite payment on or before April 15th.
- Dealing with increased deal flow: On the M&A and deal side, the pent-up demand spread from 2020 to 2021. Businesses will not be restructured to be taxable and other transactions that require IRS filings or rules. The IRS is resource efficient and is still dealing with issues from the pandemic. As a result, many companies will wait longer than usual for the IRS to process filings or issue decisions.
- Report gifts: Given the changing political environment and concerns about possible changes to estate and gift taxes, many entrepreneurs gave gifts in 2020 asking them to file a federal tax return (Form 709). Although the IRS had postponed the filing date for the return to May 17, 2021, Form 709 was still due on April 15, 2021.
As the 2021 sign-up season progresses, businesses will struggle to cope with the issues outlined above and many other challenges in 2020 and 2021.
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.
Information about the author
Michael Overstreet is an attorney in the Tax Planning & Business Transactions group in Chamberlain Hrdlicka’s Houston office. Michael can be reached at michael.overstreet@chamberlainlaw.com.
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