This article was originally published in the Winter 2020 edition of the Georgia Motor Trucking Association (GMTA)‘s magazine, TRUX.
By Steven Murphy, CPA and Chris Arnone, CPA
As we enter the final months of 2020, the COVID-19 pandemic continues to bring uncertainty to the economic landscape. While many companies are feeling the financial impact of the pandemic, others continue to weather the storm and move their businesses forward. With just a few weeks left in the year, now is the perfect time to take a moment and consider which tax planning strategies and accounting matters warrant your attention.
An unusual year may bring unusual tax situations
To varying degrees, trucking companies are generally looking at an overall decrease in revenues in 2020. While this has created several challenges, one issue that could be lurking in the shadows is in an unforeseen tax consequence of lower sales and, therefore, lower customer accounts receivable at year-end. Why would lower revenues and accounts receivable result in a surprise come tax return time? Because many trucking and logistic companies utilize the cash basis of accounting for tax purposes. In laymen’s terms, electing to use the cash basis of accounting for tax purposes is a mechanism to defer income taxes to future years and preserve cash in the business for operations, equipment purchases and debt service. For companies with a consistent or growing top-line revenue, this is an excellent tax strategy. However, a slow-down in revenues during 2020 may result in higher taxable income for these same companies. If this fact pattern applies to your company, we suggest that you work with your CPA to perform a projection of your taxable income before year-end. This will give you the opportunity to make the necessary adjustments prior to December 31, 2020, to help mitigate a surprise tax payment to Uncle Sam. More on this later.
What about our Paycheck Protection Program (PPP) Loan – how will that impact my tax returns and financial statements?
Many trucking companies have applied for, received, and are aiming for full forgiveness of their PPP loan. While these loans have provided much-needed cash to businesses, the ever-changing rules for forgiveness have been hard to decipher, which has generally caused a delay in banks accepting applications for forgiveness from borrowers. As a result, many businesses may close the year without confirmation that their forgiveness application has been reviewed and approved. So how will this impact your tax returns and financial statements?
From a tax perspective, the IRS issued unpopular guidance earlier this year stating that if any loans are forgiven, the payroll or allowed expenses paid with the loan proceeds would not be deductible for tax purposes. Further, this guidance has also been interpreted to state that even if the PPP loan is not forgiven until 2021, the associated expenses would not be deductible for 2020. This appears to leave companies with a couple of options to consider:
- 1) Pay your 2020 income taxes assuming the loans are forgiven. This means paying in more tax than you may otherwise owe. Depending on your 2019 income, you may be able to make safe harbor payments and defer the taxes on the PPP loan forgiveness until April 2021. If PPP loan forgiveness is not finalized by then, companies will need to extend the 2020 return and make an extension payment, factoring in the non-deductible costs. If it turns out the loan is not forgiven, the extra payments can be refunded when you file the 2020 returns.
- 2) Assume the PPP loan will not be forgiven. This may result in lower estimated tax payments in 2020 and the extension due in 2021 but with the risk of late payment penalties when you file the return if the loan is ultimately forgiven.
From a financial statement perspective, no direct guidance currently exists under U.S. Generally Accepted Accounting Principles (GAAP) on how to account for your PPP loan. Earlier this year, the American Institute of Certified Public Accountants (AICPA) issued guidance to assist companies in accounting for their PPP loans and their subsequent forgiveness. Its guidance suggests that companies should analogize the PPP loan to other similar situations for which accounting guidance currently exists. Below are the four analogies or methods which a company may evaluate when determining how it should account for their PPP loan:
- 1) Debt;
- 2) Government grant;
- 3) Contribution;
- 4) Gain contingency.
Let’s take a brief look at each of these methods:
Under the debt method, a company would recognize the receipt of the loan proceeds similar to other debt instruments by recording a note payable and accruing interest at one-percent, the stated rate of the loan, as long as the loan remains outstanding. The loan would remain outstanding until either (a) it is wholly or partially forgiven and the company has been legally released or (b) the loan is repaid. For the portion of the loan which is forgiven, the company would recognize a gain on extinguishment of debt when the company is legally released from its obligation under the loan agreement.
Government Grant Method
If a company expects to meet the eligibility criteria for its PPP loan to be fully or partially forgiven, it may consider accounting for the loan similar to a government grant. Under this method, a company would recognize receipt of the loan proceeds as a deferred income liability. The deferred income liability would be recognized as a grant once reasonable assurance that (a) any condition attached to the assistance will be met and (b) the assistance will be received. Since the assistance is received in advance, the second criteria would already be met. The conditions to the assistance would be spending the funds for one of the specified expenditures outlined in the PPP and complying with the other requirements of the program.
When the reasonable assurance criteria are satisfied, the company would recognize the grant on a “systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate.” The company can choose to either recognize the grant on a gross basis, in other income, or on a net basis, as a reduction of the expenses for which the grant was received (e.g., eligible compensation expense, etc.).
The third method would allow a for-profit business to account for its PPP loan, similar to how a not-for-profit company would account for a contribution. Because the contribution would be deemed conditional, a company would not recognize the contribution as income until it has substantially met the conditions for which the contribution was made. A company would record the initial receipt of the PPP loan proceeds as a refundable advance. They would then reduce the refundable advance and recognize the contribution once the conditions of the release have been substantially met or explicitly waived.
Gain Contingency Method
The final method that a company can consider is to account for the loan similar to a gain contingency. When accounting for a gain contingency, a company would recognize a gain when (a) all the contingencies related to receipt of the assistance have been met and (b) the gain is realized or realizable. If a company utilizes this method, it would record the initial receipt of the PPP loan proceeds as a liability and recognize the gain as income when all of the contingencies related to the gain are satisfied. Under the PPP, this contingency would not be satisfied until the lender approves the loan forgiveness, at the earliest.
Navigating these uncharted territories – year-end planning
After considering the items previously mentioned, if you find your trucking company needs additional tax planning strategies before year-end to help minimize income taxes, consider the following tips:
- 1) If it is not too late, consider some equipment purchases prior to year-end to take advantage of the bonus depreciation rules which allow for a 100% current year write-off for federal tax purposes.
- 2) Many of our transportation clients utilize the cash method of accounting. Begin considering opportunities to prepay expenses or pay down payables to defer income into 2021. This can help offset the tax liability from the disallowance of expenses paid with PPP Loans that were forgiven.
- 3) For accrual basis taxpayers, consider prepaying expenses or accruing bonuses to employees. As long as the bonuses are paid out by March 15, you can deduct them in the current year.
- 4) Businesses that have been impacted by COVID-19 may qualify for either the Employee Retention Credit or the Credit for Sick and Family Leave. The Employee Retention Credit provides for a refundable tax credit for wages paid by a business whose operations have been partially or fully suspended due to a governmental order or businesses that have a significant decline in gross receipts compared to 2019. The Credit for Sick and Family Leave provides a refundable credit based on compensation paid to employees who are unable to work due to conditions provided in the Families First Coronavirus Response Act (FFCRA).
- 5) Explore tax credits such as the retraining and jobs tax credits to help offset your state tax burden. In addition, many states have credits that can be purchased such as Film tax credits, Low Income Housing tax credits or others to reduce your state tax burden.
- 6) The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows employers to defer payment of the employer’s share of Social Security Tax. Employers can defer 50% of their share until the end of 2021 and the remaining 50% until the end of 2022. Originally, this deferral was not available to employers that received a PPP loan, but subsequent legislation removed this restriction. While deferring these payments will help your cash flow for 2020, it could also reduce your payroll tax expense and have a negative income tax consequence. Work with your CPA to determine the best strategy for you.
The last mile
While all of us are ready to say goodbye to 2020, the final months of the year present an opportunity to wrap up this challenging year in the best way possible. Proactively evaluating your tax situation and PPP loan accounting method prior to year-end will assist you in developing strategies to help your company. If you need help assessing which tax, cash flow and financial strategies are right for you, now is a great time to reach out to your CPA partner and set your company up for greater success in the new year.
About The Georgia Motor Trucking Association (GMTA)
The GMTA is the only organization in Georgia that provides full-time service and representation for the trucking industry. The Association serves as the “voice” of the trucking industry in Georgia, representing more than 400 for-hire carriers, 400 private carriers, and 300 associate members.
The mission of the GMTA is to work to make Georgia the best state in the nation in which to base and operate a trucking company. To that end, GMTA seeks to promote, reasonable laws; even-handed, common sense administration; equitable and competitive fees and taxes; a market, political and social environment favorable to the trucking industry; and good citizenship among the people and companies of Georgia’s trucking industry. Learn more about the GMTA here.