Leap Day Tax Consequences
Last week our calendars all marked a unique day that only comes about once every four years. Leap Day falls on February 29th but as we all know, it doesn’t annually grace our calendars. While the added day intends to synchronize the calendar year with the solar year, it does have small but real impacts on tax planning that you may need to consider discussing with your clients.
The most direct tax implication is for hourly employees who will earn additional wages on February 29th. Though minimal for each person, employers should factor the extra payroll tax liability into cash flow planning. Salaried individuals work an extra day for effectively slightly lower pay, approximately 0.27% less annually.
The extra day also allows many subscription-based services to earn incremental revenue with no additional variable cost. Practitioners should consider whether a leap year causes revenues to cross nexus thresholds in any state. These rules vary by state and industry.
For lenders, the additional day provides more interest income on outstanding loans utilizing the simple interest methodology for accrual. Confirm lenders have updated systems appropriately and are accounting for the day in interest calculations. Simple interest loans include mortgages, student loans, auto loans, and some personal loans. Many of these can impact personal as well as business income tax return deductions.
There are also expenses impacted by the additional day. Utility costs, gasoline, and food purchases will marginally increase for individuals. Businesses should factor in higher utility and fuel costs as well for the full year, adjusting budgets appropriately.
Contributions to certain tax-deferred accounts may also be impacted depending on the timing of contributions and whether or not the extra day results in any extra payroll runs. Typically, most individuals will split contributions to accounts like 401(k) and HSA across their number of annual paychecks, however, if the Leap Day provides for an extra payroll run in the year, contribution amounts could inadvertently be sent for excess contributions.
While the impacts are small, practitioners should note the marginal impact where they may lead to changes in tax deductions and cash flows. Evaluate whether any cross nexus or accounting system changes are necessary for the extra day and consider a general communication to your clients to double-check contribution amounts and limits.
Christine Gervais
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and providing strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.