COVID-19 Relief and Tax Credits Complicate 2020 Year-end Business Tax Planning

year-end-business-tax-planning

PPP, NOL, AMT, and 2020 Presidential Election have an Impact

By Susan Day, CPA

Year-end tax planning for businesses looks very different this year for several reasons including numerous federal aid measures related to COVID-19 and the 2020 presidential election results.

Business owners must consider the pandemic-related aid they received for themselves and their businesses while also weighing the impact of any potential changes in tax policy from a new presidential administration.

Several key factors are laid out here for year-end business tax planning in the final weeks of 2020. Tax planning often means determining whether to accelerate or delay income or deductions.  There are many other factors to consider, and every business circumstance is unique.  Make sure to set up a meeting with your Adams Brown tax advisor to discuss your situation.

Year-end Tax Planning for Businesses

  • The Paycheck Protection Program (PPP)
    • Under the CARES Act, a recipient of a covered loan can receive forgiveness of indebtedness on a PPP loan in an amount equal to the sum of payments made for qualified expenses. According to IRS guidance, the business 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.
  • Amend prior year tax returns
    • The CARES Act permits taxpayers to claim excess business losses for 2018 and 2019 tax returns that may have already been filed with the loss limitations imposed by the Tax Cuts and Jobs Act (TCJA). Previously, excess business losses of noncorporate taxpayers were disallowed if the loss exceeded $250,000 ($500,000 for married taxpayers filing jointly).
    • The business interest deduction limitation imposed by the TCJA was also modified by the CARES Act, and IRS guidance includes several elections that may require amending tax returns back to 2018.
    • The CARES Act fixed a technical problem with bonus depreciation which allows companies to immediately deduct the full cost of many types of business investments. The legislation expands bonus depreciation to apply to Qualified Improvement Property (QIP). QIP is commonly thought of as a retail and restaurant issue, but it is much broader and applies to almost any improvement to the interior of a building that is either owned or leased. The fix is retroactive, so businesses can fully deduct qualified improvements dating back to January 1, 2018. Taxpayers who filed 2018 and 2019 returns before the law changed can choose whether to reflect the additional retroactive deduction entirely in the 2020 year with an accounting method change or amend both the 2018 and 2019 returns to apply bonus depreciation for QIP in each of those years.
    • The net operating loss (NOL) carryback is back. The CARES Act temporarily resurrected the NOL carryback, which had been eliminated by TCJA, allowing businesses to use current losses against past income for immediate refunds. Losses arising in tax years beginning in 2018, 2019, and 2020 can be carried back five years for refunds against prior taxes. These losses can even offset income at the higher tax rates in place before 2018. Companies should consider filing amended tax returns for years in which they had losses to recapture taxes paid or get larger refunds. Beware that filing amended returns to claim the NOL carryback may trigger other changes in tax strategy for those years that may offset any benefit, so talk to your tax advisor about an analysis of your needs.
  • Payroll taxes
    • The Families First Coronavirus Response Act enacted in March 2020 provided immediate refundable payroll tax credits for businesses to reimburse them for the cost of providing COVID-19-related leave for their employees. Tax credits also were enacted to cover the employer’s share of Social Security payroll taxes, and late in the year, a presidential memorandum offered deferral of the employee share of Social Security taxes. All will impact year-end tax planning for businesses.
    • The act also provides eligible self-employed individuals with a refundable credit against income tax for qualified family leave.
  • Accelerate AMT refunds
    • When the TCJA repealed the corporate Alternative Minimum Tax (AMT), it allowed corporations to claim all their unused AMT credits in the tax years beginning in 2018, 2019, 2020, and 2021. The CARES Act accelerates this timeline, allowing corporations to claim all remaining credits in either 2018 or 2019. This gives companies several options to file for quick refunds. The fastest method for many companies will be filing a tentative refund claim, but corporations must file by December 31, 2020, to claim an AMT credit this way.
  • Student loans
    • For payments made before January 1, 2021, employers may reimburse employees for principal and interest on student loans up to $5,250 as part of an education reimbursement policy.
  • Consider claiming a disaster loss refund
    • Tax rules allow businesses to claim certain disaster-related losses on a prior-year tax return. President Trump’s COVID-19 disaster declaration was unprecedented in scope, designating all 50 states, the District of Columbia, and five territories as disaster areas. So, every U.S. business is in the covered disaster area and could be eligible for refunds stemming from certain types of losses. The provision may affect losses arising in a variety of circumstances, including loss of inventory or supplies or the closure of offices, stores, or plants. To qualify, losses must be attributable to or caused by COVID-19, among other requirements.
  • Review equipment purchases for Sec. 179 and bonus depreciation
    • For 2020, the maximum amount that can be expensed under Sec. 179 is $1,040,000, and this deduction is phased out when qualifying property placed in service exceeds $2,590,000.
    • Bonus depreciation under Sec. 168(k) allows 100% of the cost of eligible property placed in service to be deducted. (Note: this percentage will decrease to 80% in 2023, 60% in 2024, 40% in 2025, and just 20% in 2026.)
  • Business impact the of the presidential election
    • The tax ramifications of the 2020 presidential elections will not be immediate, but a change in administration could signal changes to federal tax law next year. The ability to achieve higher tax rates for high-earning individuals (over $400,000) and higher corporate tax rates, as proposed by President-Elect Biden could mean that accelerating income into 2020 and deferring deductions to 2021 are good strategies for some individuals. Click here for a full analysis of the presidential candidates’ tax proposals.