TAX VIRUS BRIEFING: Companies, Banks Brace For Far-Away Recovery (2)

April 24, 2020, 6:16 PM; Updated: April 25, 2020, 1:31 PM

The pandemic’s effects on businesses continue to come into focus—more are warning investors of trouble ahead, and banks are upping loan loss reserves. Congress passed an interim aid package, but Democrats already have high hopes for what the next measure can provide for families. The IRS has sent out billions of dollars in relief checks so far, with more to come.

Catch up on the ways the coronavirus outbreak continues to change the world.

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Red Flags to Come

Companies this quarter are more likely to file going-concern disclosures as they grapple with the negative effects of the pandemic. The disclosure, signaling a company may not survive, is a major red flag for investors.

Already Dave & Buster’s Entertainment Inc. has filed such a notice. And along with SAExploration Holdings Inc., an oil and gas company, it delayed filing annual reports this spring in part to provide more time to complete the required business outlook review.

Loan Loss Reserves

The nation’s largest banks have upped their loan loss reserves under a new accounting rule that requires them to recognize losses the day a loan is made. The change was going to be painful even before the pandemic sent the economy into a tailspin.

By the time the banks reported last week, they had piled on another $17.9 billion in loan-loss reserves in addition to initial adjustments for the current expected credit losses (CECL) standard.

Register here for an April 28 Bloomberg Tax webinar on how the pandemic is impacting the field of accounting.

Democrats’ Next Steps

More direct relief for families, in the form of cash assistance and expanded tax credits, is the focus of Democrats’ efforts in the coming weeks as Congress negotiates its next virus relief package. (The aid package passed this week replenished funding to the Paycheck Protection Program for small businesses and provided other spending for hospitals and virus testing.)

Expanding the credits is the kind of long-lasting relief that the most vulnerable will need, as the effects of the pandemic are expected to linger for years to come, Democrats say. The change could do more for those individuals than what has been offered in previous packages: $1,200 checks or the additional $600 per week for those receiving unemployment benefits.

It’s possible that even some Republicans could be swayed to support an expansion of the earned income tax credit and child tax credit.

“Some of the old political alignments are being ruptured in this moment. And in that sense, I’m actually optimistic that there could be some new alignments of unlikely suspects that forge common ground about the plight of low income people and workers in this crisis,” said Dorian Warren, vice president of Community Change Action, a group that helps low-income communities and advocates for policies that helps them.

Top Democrats are also talking about extending those cash payments to “the smallest of the small businesses” in the next round of stimulus spending.

Spending So Far: The government has already handed out $881 million in aid from the third virus relief package (Public Law 116-136), enacted about a month ago. Among that spending: The IRS has sent up to $155.9 billion of the total $292 billion it plans to send to Americans in the form of relief checks. Catch up on where that money went.

Talking Tax Podcast: The next virus relief package is expected to be more far-reaching. Learn more on the latest episode of Talking Tax.

Relief for Travelers

Travel restrictions have put some foreign individuals at risk of having to pay U.S. taxes if they are unable to return home quickly enough.

The IRS issued relief for those travelers, saying it won’t consider the time between Feb. 1 and April 1 when looking at whether nonresident aliens, foreign corporations, or partnerships are engaged in an active U.S. trade or business.

But the agency may need to take further action, as restrictions could remain in place for weeks or months.

Catch up on federal and state responses to the virus.

Potential Benefits

Depressed asset values, historically low interest rates, unprecedented exemptions, and a favorable political climate are making some estate-planning tools look more appealing than ever. And the market mayhem created by the pandemic could give an opening for the ultra-rich to shift assets to their children and minimize future estate and gift tax.

Still, estate planners said their wealthy clients have been slow to pull the trigger so far.

“Getting someone to stomach these opportunities right now” has been challenging, said Michael Rudegeair, tax director at Anchin, Block & Anchin LLP and incoming chair of an American Institute of Certified Public Accountants estate planning panel.

Added Perk: Under final opportunity zone rules and the third coronavirus response law, companies that invest in the zones can essentially split up their gains and losses and get tax breaks for both. The benefit is appealing, but its attractiveness may be limited by the fact that companies have limited cash to spare for long-term investment.

“I think it’s a fantastic idea. I think it’s very creative,” said Rich Lieberman, senior counsel at Dykema Gossett PLLC in Chicago. “But I can’t see from an economic perspective who would be in a position to want to do that.”

Global News

The OECD is still optimistic it can complete a global tax overhaul by the end of the year, despite disruptions caused by the virus.

International diplomacy isn’t easy to conduct remotely, said Pascal Saint-Amans, director of the Organization for Economic Cooperation and Development’s Center for Tax Policy and Administration, on a webcast Friday. For that reason, “we can keep going on with the project that exists, but to start new projects we need the vaccine” for coronavirus, he said.

“It’s extremely difficult to negotiate without meeting the people physically,” and technology tools enabling video conferencing don’t replace human interaction, Saint-Amans said.

  • Changes to a tax credit meant to prop up media companies in Canada won’t fix the major revenue drop stemming from the pandemic.
  • Peru’s government wants to make changes to its tax laws to better respond to the crisis. Those changes could include a tax hike on the wealthy.
  • Some European Union countries, such as France, are trying to withhold virus aid from companies based in tax havens. The EU confirmed on Friday that position is OK under the bloc’s rules.
  • Taxpayers will have more time to pay value-added tax in Israel. Individuals in Mexico will also get more time—two months—to file their taxes.
  • Italy wants to “provide certainty to companies and citizens that need to organize their business and create investment plans” by avoiding a hike on value-added and fuel excise taxes.

More international news and information on coronavirus is here.

State Developments

States will need to update their tax codes in order to avoid taxing forgiven loans from the Payroll Protection Program. Congress made those loans forgivable and said the federal government won’t tax the discharged debt.

But on the state level, it could mean an update to their tax codes to reflect federal changes on a static basis—a process that can sometimes lag by several years.

  • Debt collectors can’t claim the federal stimulus checks under a California order. We’re tracking developments across the states. Read Friday’s update here.

Bloomberg Tax has a state-by-state roadmap logging all developments as they happen.

Read this BGOV OnPoint about how pot businesses—barred from accessing federal virus aid—would be affected by legalization.

Commentary: Keep the Receipts

Keeping good records is critical for tax professionals, Bloomberg Tax contributor Kelly Phillips Erb writes this week.

“Tax breaks like the employee retention credit (ERC) and loan forgiveness programs like the Paycheck Protection Program may require substantiation of tax and other financial records at the outset to qualify for relief. But more importantly, they may require confirmation of financial burdens (or improvements) for forgiveness or credit. Maintaining sufficient, contemporaneous records means that taxpayers won’t have to struggle to offer proof later,” she said.

Dive Deeper With Bloomberg Tax Insights

  • Lauren Parker and Joshua Sutin of Chamberlain Hrdlicka: The third virus relief package made important changes to qualified retirement plans.
  • Ropes & Gray attorneys: Directors and employees may be working in unintended locations, due to travel restrictions. There are some considerations to keep in mind.
  • Robert Kovacev and Robert Morris of Norton Rose Fulbright: Think carefully before rushing to take antage of the virus law’s net operating loss carryback provision.
  • Michael Semes of BakerHostetler lays out the factors that will converge to apply tremendous pressure on state budgets.
  • White & Case attorneys: There are some unintended effects of the third relief package.
(Updates to add OECD story and Italy in Global News section.)

To contact the reporter on this story: Colleen Murphy in Washington at cmurphy@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Sony Kassam at skassam1@bloombergtax.com

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