Year End Tax Planning for Business
Most will agree that 2020 is unlike any other year. As we consider tax-planning strategies for the year end, major uncertainty continues concerning the severity of the pandemic and length of the economic recovery. Although Congress passed two major pieces of legislation in response to the health and economic impact of the coronavirus pandemic, it remains unclear if additional relief is forthcoming.
In addition, some regularly expiring tax provisions are due to expire again at the end of 2020. In the meantime, the IRS continues to release significant guidance on provisions of the Tax Cuts and Jobs Act (TCJA) passed at the end of 2017.
And let's not forget we just had an election that resulted in a change in the Presidency and, depending on the outcome of the Georgia US Senate runoff elections, could result in a flip of the US Senate to the Democrats, giving them control of the White House and both houses of Congress.
As such, each business should consider the unique challenges and possible opportunities that this year presents.
In addition to providing resources to the health community to help contain and combat the virus, the Families First Coronavirus Response Act (FFCRA) offered employees and self-employed individuals affected by the pandemic with guaranteed paid sick leave. Provisions of the Coronavirus Aid, Relief and Economic Security (CARES) Act also included numerous tax benefits for businesses.
Here are highlights for tax planning consideration at 2020 year-end:
- The Paycheck Protection Program (PPP). Under the Cares Act, a recipient of a covered PPP loan can receive forgiveness of the loan in an amount equal to the qualified expenses incurred. According to IRS guidance, the expenses related to forgivable PPP loans are not deductible. However, lawmakers state that this was not their intent. Congress will need to address the deductibility of these expenses in future legislation to clearly make these expenses deductible.
- Employee Retention Credits (ERC). The ERC is designed to encourage businesses to keep employees on their payroll and is available for qualified wages paid through the end of 2020. This credit is very similar to the paid leave credits granted to employers under the FFCRA with some changes to the requirements. Most significantly, neither the employee nor the employer has to be directly impacted by the infection. Employers can reduce their required deposits of payroll taxes withheld from employees' wages by the amount of the credit or request an advance of the employee retention credit. Eligible employers may use the employee retention credit with other relief such as payroll tax deferral, which may affect deposits and advances.
- Deferred Payroll Tax Payments. Payroll taxes due from the period beginning on March 27, 2020 and ending on December 31, 2020, can be deferred. The total payroll taxes incurred by employers, and 50 percent of payroll taxes incurred by self-employed persons qualify for the deferral. Half of the deferred payroll taxes are due on December 31, 2021, with the remainder due on December 31, 2022.
TCJA modified under the CARES Act
Several tax provisions under the TCJA were modified by the CARES Act for 2020 and earlier years providing opportunities to amend prior year returns:
- A 15-year recovery period is retroactively assigned to qualified improvement property placed in service after December 31, 2017, allowing the property to be depreciated over 15 years or, alternatively to qualify for 100 percent bonus depreciation.
- Net operating losses (NOLs) arising in tax years beginning in 2018, 2019, and 2020 now have a five-year carryback period with an unlimited carryforward period and are not limited to 80 percent of taxable income.
- The business interest deduction limit increased from 30 to 50 percent of the taxpayer's adjusted taxable income for the 2019 and 2020 tax years with special rules for partners and partnerships.
- The limitation on the deduction of excess business losses for noncorporate taxpayers does not apply for tax years beginning in 2018, 2019, and 2020.
- Corporations can accelerate the recovery of refundable AMT credits which allows corporations to claim a refund immediately and obtain additional cash flow during the COVID-19 emergency.
Businesses might consider taking advantage of the following tax benefits in 2020 before they expire. In some cases, these benefits were retroactively applied, in which case, it may be useful to amend prior year's returns if the savings are significant enough.
- The Work Opportunity Credit terminates for wages paid to workers that begin work for an employer after December 31, 2020.
- A deduction is allowed for all or part of the cost of energy efficient commercial building property (i.e., certain major energy-savings improvements made to domestic commercial buildings) placed in service after December 31, 2017 and before January 1, 2020.
- A three-year extension of the energy-efficient homes credit is available to eligible contractors for new homes manufactured after December 31, 2017 through December 31, 2020.
There is no one size fits all for tax planning and any strategy may have unintended consequences if the taxpayer's situation is not evaluated holistically considering the changing landscape. Traditional methods for postponing income and accelerating deductions may not be the best option if tax rates rise as result of the election, so this real possibility should be carefully considered.