Tax Planning in the Wake of COVID-19
In response to the COVID-19 pandemic, Treasury Secretary Steven Mnuchin has announced an initial stage of tax relief for affected Americans. In a White House briefing, Mnuchin stated that the Internal Revenue Service (IRS) will allow individuals owing payments of $1 million or less for 2019, and corporations owing $10 million or less for 2019, to defer tax payments without interest or penalty charges for 90 days, extending the payment deadline to July 15, 2020.
To contextualize the parameters, Mnuchin stated:
“If you owe a payment to the IRS, you can defer up to $1 million as an individual — and the reason we are doing $1 million is because that covers pass-throughs and small businesses — and $10 million for corporations, interest-free and penalty-free for 90 days.”
It is essential to note the change does not extend the April 15th deadline. The IRS still expects all returns to be filed on-time, they are simply providing an option for penalty-free deferment. Taxpayers will still be required to pay their tax bill in full at the end of the deferment period, barring any additional government relief.
In his briefing, Mnuchin also made a point of clarifying that taxpayers can still file for the standard six month extension, which extends filing and payment due dates to October 15, 2020.
The move by the IRS is positioned to have a two-fold effect on individuals and businesses experiencing a ‘cash crunch’ due to the COVID-19 outbreak. By delaying payments on tax debts, affected individuals and businesses can use the additional 90 days to build the cash reserves necessary to make their tax payment. This provides much-needed breathing room for those in industries directly affected by the outbreak, including the travel and service industries (hospitality, restaurant/dining, etc.)
The second beneficial impact is aimed at providing a boost to the U.S. economy. By Mnuchin’s calculations, the plan will free-up as much as $300 billion in would-be tax payments, creating “an enormous amount of liquidity in the system.” This gives individuals and corporations flexibility when it comes to everything from business and investing activities, to making necessary purchases during quarantine periods.
Many tax payers and tax professionals were hoping for an extension to the April 15th deadline, as quarantine measures and other obstacles are making it difficult for many to access the necessary information to file on time.
The IRS is still processing tax returns and issuing refunds. For taxpayers in need of the refund to mitigate cash problems, filing as soon as possible remains the recommended approach.
The IRS has issued formal guidance on this issue, which can be found here.
If you have any questions regarding the new payment dates, the status of filings, or other tax issues please reach out to us for a consultation.