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Coronavirus: How the 2020 delayed 1040 due date will impact bankers

As I write this, the IRS has agreed to a delay filing of the 1040 tax return and payment of  tax payments due on April 15th 2020 to July 15th 2020. This is relief due to the Coronavirus Pandemic.

Many complicated borrower returns have been extended every year, such as those who are owners in a pass-through entity. As a result of this ruling, lenders and credit professionals can expect many more to extend their return in 2020.

What difference does it make?

Similar to the great recession, bankers will need the most reliable, up-to-date information to determine credit worthiness for borrower requests, including those who are looking for an expanded operating line of credit to weather the pandemic. Without a 2019 tax return, lenders will need to rely on 2019 financial statements. For smaller businesses, these are generally not ‘reviewed’ or ‘audited’ by a CPA firm.

Looking for an answer?

Sorry, I do not have a great answer for this. But if you know what to expect, you might plan ahead for what will be acceptable evidence of credit worthiness in the absence of tax returns that would have been filed in April.

Maybe this will work…

I once filed my return early simply because the lender needed the information. I do not know if the borrower can file now and still defer payment until July. That would be sweet!

Consider asking your borrower to go ahead and file the return, even thought it is not yet due. If they do not owe taxes anyway, or the bill is not large, they may be willing to do so to expedite the loan they are requesting. Now you have your normal documentation to work with.

Get out the crystal ball…

Now, more than ever, it is important to dig deeper and determine if the 2019 tax return year represents what will happen in 2020. Some lucky businesses actually will have a good year because they are in a very specific niche that will benefit from the current chaos. More companies, even if very solid, will take a huge hit. Lending and Credit Management will need to rethink how to tell the difference between a solid business in temporary difficulties that will bounce back, and a business that will not recover after the pandemic subsides.

(Updated for relief from filing as well as paying.)

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.