Year-End Tax Planning for the CARES Act and PPP Loans

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Webinar Explores Year-End Tax Implications of COVID-19 Legislation

In a recent webinar, three Adams Brown team members discussed various tax planning scenarios for the year like no other: 2020. Austin Coyan, CPA, CFE; Jennifer Berning, CPA; and Cody Scheck, CPA covered the potential impacts of Biden’s proposed tax plan, estate planning, gifting, and considerations for farmers.  They also covered the temporary tax benefits contained in the CARES Act, including year-end planning for the Paycheck Protection Program.

Retirement benefits through the CARES Act included a temporary waiver for required minimum distributions and the ability to make a covered distribution from a qualified retirement plan without the early withdrawal penalty. Under that provision, taxpayers could take out up to $100,000 if they or their spouse were diagnosed with COVID-19 and had financial difficulties as a result. Austin explained that these distributions could be taxed over three years or in one year, meaning taxpayers can pay the income tax in 2020 or spread out the income tax over the next three years.

However, as long as the money is paid back within three years, no income tax is actually due, meaning a taxpayer would have to file amended returns for the previous two years to reclaim the excess in paid income tax. Retirement account distributions are one tax planning consideration related to the CARES Act, and this post goes into more detail about it.

Also in 2020, there is no age limit on a Roth or traditional IRA contribution. Typically, once a taxpayer is able to start taking distributions from a qualified retirement plan, they are not permitted to make additional contributions. If a taxpayer is close to another tax bracket and in retirement age, this could be a valuable strategy to keep taxable income down.

The PPP loan was arguably the most talked-about provision that came out of the CARES Act. Recent IRS guidance states that if a business expects their PPP loan to be forgiven, the amount is taxable this year. One current tax planning strategy is to defer forgiveness to 2021 if possible because of this lack of clarity. Congress has said this is not their intent for PPP and are working on legislation to fix it. Read more about year-end tax planning for PPP loan forgiveness.

Payroll tax deferral is another aspect of CARES Act-related tax planning. Cody went on to explain that through the CARES Act, small employers had the opportunity to defer paying the employee portion of payroll taxes until 2021 and 2022. There are other rules to this, though. These rules include new payroll form reporting requirements, among other items.

The CARES Act also permitted a one-time $300 cash charitable contribution in 2020, regardless of whether the taxpayer itemizes their return or not. Our interpretation is that this is $300 per tax return, not $300 per individual if married filing jointly.

There may also be opportunities to amend prior year returns based on CARES Act guidance; for example, the depreciation of qualified property for capital expenditures. Returns can be amended back to January of 2018 if needed. Net operating losses is another example. The CARES Act temporarily restored the opportunity to carry back NOLs for up to five years for losses incurred in 2018, 2019, or 2020.

Individual tax filers may also have an opportunity to amend prior year returns. The CARES Act extended more than 30 provisions that had previously expired.

Each of these scenarios requires additional planning and consideration and involves much more detail than the high-level overview provided here. The full webinar also discussed Biden’s proposed tax changes and implications for year-end planning as well as special considerations for farmers. The webinar recording is available on demand.

For questions about CARES Act-related tax guidance and other year-end tax strategies, reach out to your Adams Brown advisor.