COVID-19 and its Impact on the Tax Provision Preparation Process

The COVID-19 virus pandemic has impacted all aspects of our lives. We’ve learned new phrases, like social distancing, flattening the curve, and working from home has taken on a whole new meaning.

There is no such thing as business as usual, but business still needs to get done.

COVID-19 and the passage of the CARES Act just weeks ago has changed the financial landscape and requires financial professionals to reassess what impacts it will have on their company’s tax provisions and financial statements.

Here are five key considerations CFO’s and financial professionals should be weighing, as they relate to their company’s tax provisions:

1. Net Operating Losses - The CARES Act significantly changed the rules relating to net operating losses. These net operating loss rules had just been significantly altered as part of the Tax Cuts and Jobs Act.
   • With the ability to now carryback net operating losses incurred in 2018, 2019, and 2020 to the previous five years, companies who may have deemed a valuation allowance on these NOL’s necessary, may need to reevaluate the realizability of these NOLs. If they will be preparing a net operating loss carryback claim, they should also consider the potential tax rate impact of carrying back losses to years where they potentially paid tax at 34% tax rates versus offsetting income currently at 21% tax rates.
2. Going Concern and Asset Impairment Issues - With the hit the economy and businesses have taken, companies will need to assess going concern issues as well as possible asset impairment issues. The evaluation of both requires significant judgment and the impacts on the tax provision may differ depending on the type of asset that is deemed impaired (goodwill, tangible assets, and other intangible assets). Companies who have never had to worry about going concern and asset impairment issues may need to revisit their internal control policies and consider how to best identify these issues.
3. Valuation Allowance Considerations – While Companies with net operating losses incurred in 2018, 2019, or 2020 may realize these tax assets in the form of cash refunds, through carryback claims, these companies should reassess their budget forecasts in connection with their assessment of the realizability of their deferred tax assets. Assessing whether a partial or full valuation allowance is necessary takes considerable time and effort and certainly is not a black and white effort.
4. State Tax Implications – With the significant changes to the Internal Revenue Code as part of the CARES Act, states have had to pivot quickly and issue their own guidance on whether to decouple from federal provisions of the CARES Act. Corporations operating in multiple states will need to consider the quickly changing state tax landscape and the impact those changes will have on their state effective tax rates, for both current and deferred tax accounting. It will take considerable effort to assess the state tax implications of the CARES Act, since each state may take a different approach.
5. Public Company Implications – SEC registrants are required to provide quarterly earnings releases as well as other regulatory filings. These quarterly filings require companies to accurately estimate their annual earnings in order to arrive at an effective tax rate to apply to quarterly earnings results. The COVID-19 pandemic has created volatility and uncertainty and has made it difficult for companies to predict future results.
   • Given the considerable time and effort required to prepare these quarterly filings, the SEC has granted public companies a 45-day extension of time to file applicable reports that were originally due between March 1 and July 1. These include Form 10-K’s for calendar year 2019 filers (to the extent not already filed), Form 10-Q’s and Form 20-F’s for the quarter ending March 31, 2020. Companies will need to file a Form 8-K or Form 6-K by the original due date to explain that they are utilizing the SEC’s Conditional Extension.

The COVID-19 pandemic has created uncertainty in all aspects of our lives, including the calculation of the company’s tax provision. Consideration should be given to the items outlined above. Bonadio is here to assist companies and our clients with the calculation of their tax provisions in these uncertain times.

Feel free to contact Nathan Pensgen below with any questions.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We therefore make no warranties, expressed or implied, on the services provided hereunder.