As we approach summer 2021, more businesses have resumed normal (or close-to-normal) operations, and more employees have returned to work. Many aspects of 2021 seem brighter than 2020—but the 2021 tax filing season isn’t one of them. For a lot of businesses, the 2021 tax filing season is an anxiety-rendering rat’s nest.
The federal tax filing season began on Feb. 12, 2021, about two weeks later than usual. With the country still reeling from the Covid-19 pandemic, many anticipated that the IRS would extend federal tax filing and payment deadlines as was done in 2020 (when most federal tax return filing and payment deadlines were moved to July 15, 2020).
“Many businesses continue to struggle with the economic impacts of Covid-19 along with significant changes in how (and where) employees perform their jobs. This coupled with the various changes in tax law, changes in due dates of tax filings and payments, and anticipation of future tax law changes is creating frustration with businesses in relation to the added administrative burden,” explains Brian Carey, CPA, tax senior manager at Crowe LLP.
Around the same time as the filing season started, 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 for the extension announcement through late March. With the deadline quickly approaching, many assumed the extension would never come. Finally, on March 17, 2021, the IRS announced the extension. However, for many businesses, it was more fizzle than sizzle. Individual taxpayers automatically have until May 17, 2021, to complete their 2020 federal income tax filing and pay their 2020 federal income taxes. That’s it. Q1 2021 estimated taxes and C corporation tax returns were still due on April 15, 2021. In many states, state taxes for individuals were still due on April 15, 2021.
What the Extended Tax Filing Deadline Means for Businesses
At first glance, it might be unclear how the extended 2021 tax filing deadline affects businesses. The March 15 deadline still applies to S corporations and partnerships. The April 15 deadline still applies to C corporations. However, most U.S. businesses consist of the self-employed or the underlying owners of entities treated as flow-through entities for tax purposes. These taxpayers make estimated tax payments each calendar quarter. Although these taxpayers’ filing deadline is extended to May 17, 2021, they still have to file their estimated tax payments for Q1 by April 15, 2021.
Business groups and CPAs complained that not postponing the deadline for estimated Q1 2021 payments would harm small businesses and the self-employed, many of whom suffered the pandemic’s worst impacts. For a time, it seemed these complaints were picking up steam.
On April 8, Rep. Lloyd Smucker (R-Pa.) introduced a bill (H.R. 2437) to extend the due date for the Q1 2021 estimated tax payment to May 17, 2021. However, the April 15 deadline has come and gone, and (as of this writing) Rep. Smucker’s bill is still in its first phase. Despite all the fuss, the IRS seems to be holding steady. On April 13, 2021, IRS Commissioner Rettig testified to the U.S. Senate Finance Committee that expanding the scope of the extension would pose “a significant potential risk to implementing the [American Rescue Plan Act].” Commissioner Rettig noted that this “could further delay delivery of Recovery Rebate Credits (RRCs) and the third round of EIPs, as well as refunds—including EITC and CTC Payments—to the most vulnerable Americans.”
Tax Filing Challenges
As businesses and their advisers struggle to meet 2021 filing and payment deadlines, they face many challenges in the 2021 tax filing season. The challenges include (but are not limited to) the following:
- Interpreting Covid-19 Relief Provisions: Businesses may struggle to accurately report items related to the Covid-19 relief provisions enacted last year. They may need to take positions with little or no official guidance. Previously issued guidance may later be found outdated. For example, the IRS’s initial position was that taxpayers were not allowed to deduct expenses that would otherwise be deductible if the payment of the expense was anticipated to result in the forgiveness of a PPP loan pursuant to the CARES Act. This initial position left taxpayers in a difficult spot. On Jan. 6, 2021, in Revenue Ruling 2021-2, the IRS declared its prior guidance obsolete and took the opposite position. In other words, a plethora of previously nondeductible expenses from 2020 is now deductible.
- Calculating Quarterly Payments of Estimated Taxes: As mentioned above, many businesses and their owners must make quarterly payments of estimated taxes. For 2021, the first quarterly payment was due on April 15, 2021. Taxpayers typically use last year’s taxable income to forecast income to estimate their quarterly payments. However, 2020 was an unusual year, so using those numbers may not be helpful. If the forecast for 2021 income is too high, this results in an overpayment, which reduces cash flow for many cash-strapped companies. If the forecast for 2020 is too low, there could be an underpayment penalty.
- Additionally, some individual taxpayers opted to overpay last year’s federal income taxes and apply the overpayment to their first quarterly estimated tax payment for 2021. Until the IRS recently issued guidance on this issue, taxpayers faced uncertainty on whether the IRS would treat the overpayment as paid on May 17 despite being paid on or before April 15.
- Handling Increased Deal Flow: On the M&A and deal side, the pent-up demand from 2020 spilled into 2021. Companies are undergoing non-taxable reorganizations and other transactions requiring IRS filings or rulings. The IRS is resource-strapped and still dealing with issues from the pandemic. As a result, many companies will find themselves waiting longer than usual for the IRS to process filings or grant rulings.
- Reporting Gifts: Lastly, with the shifting political environment and concerns over the potential estate and gift tax changes, many business owners made gifts in 2020 requiring them to file federal gift tax returns (Form 709). Even though the IRS delayed the individual return filing date to May 17, 2021, Form 709 was still due on April 15, 2021.
As the 2021 filing season continues, companies will struggle to cope with the issues described above and many other challenges from 2020 and 2021.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.