2020 has been a year that has presented many business challenges. With the upcoming election, there is much uncertainty regarding year-end tax planning in a year that precedes potential dramatic income tax changes. While 2020 tax rates are relatively low, year-end tax planning could involve either deferring income and accelerating expenses if tax rates will remain unchanged or accelerating income and deferring deductions if it is likely rates will increase in 2021. In addition to the impending election, as we enter the later part of 2020, many tax changes were made in response to the Coronavirus pandemic that warrant consideration in your year-end tax planning.
Here are 9 considerations for effective year-end tax planning for 2020:
1. Family Leave Credit and Sick Leave Credit
The Families First Act provides for payroll tax credits to employers that paid certain qualifying family or sick leave. It should be noted that gross income of the employer is increased by any of these credits allowed against payroll taxes.
2. Employee Retention Credit
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a 50% credit for certain wages paid to employees. However, no deduction is allowed for wages equal to the amount of credit claimed. Therefore, 50% of all qualified wages up to $10,000 per employee will not be allowed as a deduction. The result of this provision is that the net benefit of the credit is reduced by the taxpayer’s marginal tax rate.
3. Payroll Tax Deferral
The CARES Act provides a deferral of employer’s share of Federal Insurance Contributions Act (FICA) tax paid on wages beginning March 27, 2020 and ending December 31, 2020. The deferred taxes would then be 50% payable by December 31, 2021 and 50% payable by December 31, 2022. It should be noted that these deferred taxes may not be deductible until such time they are actually paid.
4. Paycheck Protection Program (PPP) Loan
The CARES Act provides amounts of any PPP loan that is forgiven will not be included in taxable income. However, in Notice 2020-32, the Internal Revenue Service has taken the position that the costs that were expended from PPP loan proceeds that were forgiven would not be deductible. The IRS has also interpreted the authorities they cited in the Notice that this disallowance would occur in 2020 (the year of the expenditures related to the forgiven PPP loan) even if formal forgiveness of the loan does not occur until 2021.
5. Accounting Method Changes
The Tax Cuts and Jobs Act (TCJA) enacted for 2018 allows small business taxpayers with average annual gross receipts less than $26M (adjusted for inflation) for the three year period preceding the current year to use the cash method of accounting. Additionally, small business taxpayers are to be exempted from the following:
- The uniform capitalization rules of Sec. 263A;
- Specific inventory accounting rules;
- The business interest expense limitation rules of Sec. 163(j); as well as
- Certain long-term contracting requirements
The availability of one or all of these items above could have large impact on your current year taxes. Changes from any of these methods can be made up to the due date of your 2020 tax return.
6. Net Operating Losses
The CARES Act changed rules related to Net Operating Losses incurred in 2018, 2019 and 2020 to allow them to be carried back 5 years. Consideration should be given to determine if the loss should be carried-back or elected to be carried-forward. The availability of a rapid federal tax refund under these new rules needs to be measured against potential differences in state tax rules as well as differing tax rates in earlier years.
7. Depreciation/Qualified Improvement Property (QIP)
The CARES Act corrected a drafting error in the TCJA and retroactively restored the 15 year tax life to QIP. This change allows these improvements which have been depreciated over 39 years to now be retroactively depreciated over 15 years or to immediately be expensed as bonus depreciation. Proper year-end planning would include review of these changes to see their potential impact on current year taxes.
8. 163(j) Limitation – Business Interest Expense Limitation
The CARES Act made changes to the business interest limitation rules enacted by TCJA by providing:
- An increase limitation for interest expense from 30% of adjusted taxable income to 50% for years 2019 and 2020
- Taxpayers may elect to substitute their 2019 Adjusted Taxable Income (ATI) for 2020 ATI for tax years beginning in 2020
- For taxpayers that may have significantly reduced ATI in 2020, it potentially allows for larger deduction in 2020
9. Gift and Estate Planning
The 2020 federal estate and gift tax exemption is $11,580,000 per person and $23,160,000 for a married couple. These figures are scheduled to sunset back to $5 million and $10 million, respectively, after 2025 (adjusted for inflation).
With the potential change in administration, the possibility exists for this exemption to be significantly reduced. This should provide an opportunity to review gift and estate plans before year-end to potentially take advantage of these higher exemptions. Additionally, given the low-rate interest environment, potential reduction in values of businesses due to Coronavirus and other business-related factors, now may be a good time to transfer business interests at a lower value and utilize these exemptions.
As with any tax year, it is important that you have conversations with your tax advisor sooner rather than later to allow time for year-end projections and planning discussions to be had and allow time for strategies to be implemented.
To help you navigate through the myriad of challenges you are facing, Citrin Cooperman has developed a dedicated COVID-19 Response Unit (CRU) resource center. CRU contains critical, up-to-date legislative developments, tax alerts, business guidance articles, recorded webinars, and more.
Citrin Cooperman is a nationally recognized, full-service CPA firm, currently ranked in the U.S. top 25. The firm offers assurance, tax, and business advisory services to help clients remain competitive in today’s market.
John Finnerty is a tax partner in Citrin Cooperman’s Providence office. He assists his clients with tax planning, compliance, and research services in various industries, including real estate, construction, and manufacturing and distribution.
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