Don’t Get Caught Short in 2021: Ensure Your Cash Flow Now For Future Needs

October 12, 2020

By Tatyana Levy, CFO, FMS Solutions

COVID-19 has created an interesting environment for the independent grocer and the world. Independents have done an excellent job serving their communities and insuring a safe environment for their employees and customers alike. As we look forward to a vaccine and a return to normal, retailers may think the end of this unusual way of life is near.

With that, retailers may be planning to step back any bonus pay implemented during the pandemic or adjust labor levels as sales spikes decrease. However, planning needs to look beyond labor supply, inventory and pay. Retailers need to seriously think about cash flows.

There are three main points to plan for, as cash may appear to be growing during this time, but outflows will be large when it comes to future government liabilities.

The first item is the deferral of FICA, by presidential order (IRC §7508A). If you deferred your employer portion of FICA for the period Sept. 1 thru Dec. 31, you have pushed your cash payment into the future. However, unless the government forgives this payment, you will have to make the 2020 deferred payments along with your normal future FICA payment. You should keep this in mind when looking at your future cash needs. While it is not an extra amount, with the deferral, don’t lose sight of your committed cash in your bank account.

The second item is PPP loan forgiveness. The expenses that were paid for using the PPP loan, if forgiven, will not be tax deductible. That means if you received a $1 million loan forgiveness to apply against expenses, you have essentially created $1 million in taxable income (the expenses are not deductible and therefore will add to your bottom line). If you have a 20% tax rate, you will have, in this example, a $200,000 tax liability. Because most business owners pay estimated taxes based on the prior year, you should plan for the additional tax expense next year.

The third issue also relates to estimated tax payments and potential cash outflows. For 2019, you most likely paid taxes and were required to pay estimates in 2020. Most years, your taxes come out plus or minus against the four quarters of estimated tax payments. With increased sales and profits come increased taxes. You need to keep this in mind when looking at your cash requirements in 2021.

Items two and three present you with some tax planning opportunities. Capital expenditures that would have taken place next year may be better pushed forward into 2020. However, as with any planning, there are always complications.

This is an election year. The possibility of a Biden administration tax increase on corporations or the removal of other deductions that benefit pass thru entities may influence your decision. The timing of your decision may have real financial impacts to you and your business. You may need time for certain capex projects to complete them before the tax year end (e.g., order times, installation, etc.).

If Biden wins the White House and Democrats win a majority in the Senate, it may make sense to let those projects fall into next year for fear of higher rates in 2021. If Trump wins or Republicans hold the Senate, you may desire to reduce your current-year taxes as rates will be unlikely to increase in 2021.

In summary, begin planning what your cash outflows will be, so you’ll have cash on hand to pay income taxes and delayed FICA payments without intruding on your operating decisions in 2021. You may want to consider reaching out to your tax professional right away to ensure time to enact a plan to reduce income taxes.

CFO of FMS Solutions Holdings LLC, Tatyana Levy is a CPA licensed in Pennsylvania and is a graduate of Temple University Fox School of Business. Her background includes both private equity and public accounting with HIG Capital and Deloitte, respectively. Contact her at tatyana.levy@fmssolutions.com.