It’s Time for Year End Tax Planning
By: Edward Nieh, Senior Tax Manager (Doyle, Schultz & Bhatia, PLLC)
As we approach the end of 2020, the implications and the complexity for year-end tax planning has perhaps never been greater or taken on even more importance. Between the pandemic that shuttered the global economy to the election of the 46th president of the United States, there has possibly never been more avenues to reduce your current year tax liability or even next year tax liability. Let’s examine some ideas for 2020.
As a result of the pandemic, Congress enacted changes in tax law that attempt to mitigate the financial impact of the Virus of which some should be considered as part of this year’s tax planning. While most tax changes from recent years generally remain in place, including lower tax rate, larger standard deductions, limited itemized deductions, elimination of personal exemptions, an increase in child tax credit, lessened alternative minimum tax credit for individuals, eliminated corporate AMT, limits on interest expense deduction and generous expensing and depreciation rules for businesses. And non-corporate taxpayers with certain income from passthrough entities may still be eligible for a valuable deduction.
- The Paycheck Protection Program Loan Forgiveness: One of the biggest variables for tax planning this year is to understand the tax impact of PPP loan forgiveness. The Internal Revenue Service through Revenue Ruling 2020-27 amplified their stance that PPP related expenses allocable to tax exempt forgiveness income is not deductible under IRC Section 265. In essence, any otherwise deductible expenses that was reimbursed through the PPP is not deductible in the year those expenses were paid or accrued (2020). The Ruling cites examples in which demonstrates that the timing of the application and ultimate approval does not alter the related tax deduction disallowance. For example, if business A receives a loan of $100,000 for covered expenses and expects 100% forgiveness, then those covered expenses are not deductible, regardless if you applied for forgiveness in 2021 or ultimately got 100% forgiveness.
However, a safe harbor is provided under Revenue Procedure 2020-51 that allows the taxpayer to claim a deduction in 2020 or in a subsequent year if forgiveness is denied in part, whole or not sought. For example, if company A finds out that only $90,000 of the loan proceeds was forgiven then it would be allowed a $10,000 deduction. The $10,000 deduction can be reported on a timely filed 2020 or 2021 return. In either case, we recommend that a disclosure be included on the return to disclose the deduction
- Making Additional Cash Charitable Contributions: For 2020, any taxpayer can claim a $300 above the line deduction on charitable contributions made in 2020, even if you don’t itemize deductions. Also, for this year, charitable contribution deductions are not limited at all by modified adjusted gross income. Previously it was limited to 60% of modified adjusted gross income. Meanwhile, corporations can deduct such contributions up to 25% of taxable income.
- Excess Business Losses: Under Tax Cuts & Jobs Act, losses from all of your trades or businesses were limited to $250,000 and $500,000 (for joint filers). The CARES Act repealed this for years beginning before January 1st, 2021. If your passthrough business sustained significant enough losses in 2019, you may amend your tax return in 2019 and carryback those losses back to 2014 and obtain a quick refund of the overpayment from carrying back those losses if such is filed before 12/31/2020.
- The Work Opportunity Tax Credit: This use-it or lose-it credit expires at the end of the year and while Congress could extend this credit, that is certainly not a guarantee. This is a credit that could be beneficial for employees that hire from a targeted group including veterans, ex-felons, vocational rehabilitation referrals, summer youth employees, Supplemental Nutrition Assistance Program recipients, and Supplemental Social Security recipients and long-term unemployed (26+ weeks).
- Individual Retirement Account: Another way to save money is to make a deductible IRA contribution.
a) Traditional IRA: The IRA can be made for each spouse. The annual contribution limit for 2020 is $6,000 or $7,000 if you are 50 years or older. The deadline to make a contribution for the year is April 15th of the following year.
b) Simplified Employee Pensions (SEP): For small business owner, a contribution to your own SEP is the lesser of 25% of compensation or $57,000 in 2020. For qualified SEP IRA plan a contribution up to the limit is not taxable. Again, the contributions need to be made by April 15th of the following year.
- Required Minimum Distributions: The required minimum distribution is the amount of money that must be withdrawn from a traditional, SEP or SIMPLE individual retirement account by owners and qualified retirement plan participants of retirement age. Due to the CARES Act, there is not required minimum distributions this year which may put the taxpayer in a lower income bracket. Hence, it may be advisable to accelerate income to 2020 if you find yourself in a lower tax bracket due to not receiving such distribution. In addition, the age which you must begin mandatory withdrawals from retirement accounts is now 72, up from 70 ½ pre-2020.
- Business Interest Expense Limitation: Now is the time to accelerate some interest expense payments as the deduction for business interest expense is limited to 50% of adjusted taxable income (“EBITDA”). For taxpayers with lower income may get a higher interest expense this year.
Above are just some of the tax planning strategies to consider for year-end planning. Time is of the essence. Please consult your trusted tax advisor at Doyle, Schultz & Bhatia, PLLC for ways to minimize your tax liabilities in 2020 and 2021.
Edward Nieh, CPA, MST
Senior Tax Manager