We hope that you and your loved ones are safe as you deal with the current COVID-19 crisis. What an incredibly difficult year this has been! This most recent tax season was unlike any we’ve ever experienced. We are reaching out today to discuss some opportunities that should be addressed sooner rather than later for 2020 tax planning.

It’s possible that additional COVID-19-related tax changes could be implemented as the year progresses. We also need to keep in mind that 2020 is an election year. While we don’t anticipate significant tax law changes if President Trump is reelected, a new occupant of the Oval Office would almost certainly lead to tax reform (with possible higher tax rates). As always, we’re paying close attention to the ever-changing tax environment to discover tax planning opportunities that could put more cash in your pocket. In the meantime, here are some ideas to evaluate this summer while you have time to think about them.

Year-end Planning Moves for Small Business

If you own a business, consider the following strategies to minimize your tax bill for 2020.

• Net Operating Losses (NOLs). To assist small business owners who may have incurred losses as a result of the COVID-19 crisis, the CARES Act temporarily removed the TCJA limitation on NOLs. Because the new law is retroactive, you can now carry losses that originated in 2018 through 2020 back five years. This means you could carry a 2018 NOL back as far as 2013. Since tax rates were higher in 2017 and earlier years, carrying back an NOL should be much more beneficial than carrying that loss forward.
   
• Business Interest Expense. The CARES Act relaxed the limitation on the deductibility of business interest expense. Under the TCJA, the deduction was generally limited to 30% of Adjusted Taxable Income (ATI). For 2019 and 2020, that limit is generally increased to 50% of ATI. Special rules apply to partnerships and their partners.
   
• Better Depreciation Rules for Real Estate Qualified Improvement Property (QIP). The CARES Act includes a technical correction to the TCJA that is retroactive to 2018. The new rule allows much faster depreciation for real estate QIP that
  is placed in service after 2017.
   
• The retroactive correction allows you to claim 100% first-year bonus depreciation for QIP expenditures placed in service in 2018–2022. Alternatively, you can depreciate QIP placed in service in 2018 and beyond over 15 years using the straight-line method.
   
• Amending a 2018 or 2019 return to claim 100% first-year bonus depreciation for QIP placed in service in those years could result in an NOL that can be carried back to a prior tax year to recover taxes paid in that year, as explained earlier. There also is an option to file an accounting method change for the business in lieu of amending returns. We will work with you to determine if it’s better to claim 100% bonus depreciation or deduct the cost of QIP over 15 years.

Individual Income Tax Opportunities

Here are some strategies that may lower your individual income tax bill and help with cash flow for 2020.

• Consider Adjusting Your Tax Withholding or Estimated Payments. If you owed taxes for 2019, you may want to revise your Form W-4. To help you do this, consider using the IRS’s “Tax Withholding Estimator,” available at www.irs.gov/individuals/taxwithholding-estimator. If you make estimated tax payments throughout the year (you’re self-employed, for example), we can take a closer look at your tax situation for 2020 to make sure you’re not underpaying or overpaying. Also, if your 2019 return applied an overpayment to 2020, but you would now prefer a refund, you have until 7/15/20 to file a superseded return and request a refund.
   
• Take Advantage of Lower Tax Rates on Investment Income. Income from an investment held for more than one year is generally taxed at preferential capital gains rates. Those rates are 0%, 15%, and 20% for most investments. The rate that applies is determined by your taxable income. If possible, you should get your income low enough to qualify for the 0% rate. If your income is too high to benefit from the 0% rate, try gifting investments (like appreciated stock or mutual fund shares) to children, grandchildren, or other loved ones. Chances are these individuals will be in the 0% or 15% capital gains tax bracket. If they later sell the investments, any gain will be taxed at the lower rates, as long as you and your loved one owned the investments for more than one year. However, beware of the “Kiddie Tax,” which applies to all children under age 18 and most children age 18 or age 19–23 who are full-time students. It may limit your opportunity to take advantage of this strategy.
   
• Retirement Plans. If you’re affected by COVID-19 and find yourself in need of additional cash flow, the CARES Act contains several taxpayer-friendly provisions for retirement plan distributions up to $100,000 taken prior to the end of 2020. If you have funds in a traditional IRA and have been considering converting the account to a Roth IRA, 2020 might be a great year to execute that plan.
   
• Check Your Deduction Strategy. It’s best to itemize your deductions if you have significant personal expenses. However, don’t rule out the standard deduction. For 2020, joint filers can enjoy a standard deduction of $28,400. The standard deduction for heads of household is $18,650, and single taxpayers (including married taxpayers filing separately) can claim a standard deduction of $12,400. If you’re able to itemize, please note that the Tax Cuts and Jobs Act (TCJA) (a major tax reform bill passed in December 2017) suspended or limited many of the itemized deductions. However, we have some planning techniques that may help.
   
• Last, but not least, the SECURE Act removed the age limitation for deductible contributions to a traditional IRA. So, if you’re over the age of 70½ and have earned income, you may want to consider making a deductible IRA contribution in 2020.

Please Contact Us

As we said at the beginning, this article is to get you thinking about tax planning moves for the rest of the year. Even though the IRS continues to publish guidance on COVID-19-related developments, there are things you can do now to improve your tax situation.
Please don’t hesitate to contact us if you want more details or would like to schedule a tax planning session.

Potential changes for Estate Planning

The current federal estate and gift tax exemption is around $11,000,000 per person, it is currently speculated that this amount may decrease significantly. Of course, trying to guess what and how the tax laws may change is a fortune teller’s game. Tax law changes are sometimes retroactive but are usually effective at the beginning of a year. If you have an estate over $3,000,000 per person, it may be time to do some estate/gift tax planning to take advantage of the $11M exemption. Estate tax rates are currently around 40 percent. There is also some discussion that valuation discounts for closely held businesses may be eliminated.

Beginning in 2020, two new options are available for offering Health Reimbursement Arrangements (HRAs) to employees. We’ve provided a brief overview of these new benefit options to help you determine if either of them may be a good fit for your business.

Individual Coverage HRA (ICHRA)

This is an HRA that can be integrated with either individual market health insurance coverage or Medicare coverage and can be offered by employers of any size for plan years beginning on or after 1/1/20. You can choose to contribute as much or as little as you want and funds in the ICHRA can be used by the employee to reimburse any qualifying medical expense, including premiums paid for qualifying individual health insurance policies.

An ICHRA provides a tax-favored method for your employees to pay for individual health coverage without you being involved in plan selection and the often-costly policy administration. However, there are numerous conditions that must be met to qualify as an ICHRA.

Excepted Benefit HRA (EBHRA)

Employers of any size can offer an EBHRA for plan years beginning on or after 1/1/20. However, an EBHRA must be offered in conjunction with a traditional group health plan. Your contributions to each employee’s EBHRA are limited to $1,800 for 2020 (adjusted for inflation beginning in 2021), but employees can carry forward their unused balances to the next year without counting towards the
annual limit.

Your employees can use the funds in an EBHRA for any qualifying medical expenses, with the exception of individual health insurance premiums and group health insurance premiums (other than COBRA). Copays, deductibles, and premiums for excepted benefit coverage, like vision, dental, and short-term limited duration coverage, are all EBHRA reimbursable expenses.

In August, a Presidential Memorandum was issued allowing the deferral of the employee’s portion of Social Security tax withholding, which is 6.2% of wages.

• This is a deferral, not forgiveness of payroll taxes.
• Employers are not obligated to allow for the deferral.

New guidance has been released from The Department of the Treasury and Internal Revenue Service regarding the details.

• Employers have the option to defer the withholding, deposit, and payment of the employees’ portion of Social Security tax on eligible wages paid from September 1, 2020 to December 31, 2020.
• For the employees’ wages to be eligible, the pretax wages or compensation during any biweekly pay period must be less than $4,000. The $4,000 threshold is made on a per-pay-period basis, irrespective of the amount paid in prior or future pay periods. An equivalent threshold amount for shorter or longer pay periods may be used.
• Deferred taxes must be withheld from the employee’s paycheck and paid to the IRS from January 1, 2021 to April 30, 2021. This is in addition to regular withholding.
• Starting May 1, 2021, interest and penalties on the unpaid tax will begin to accrue and are assessed against the employer.
• Employers remain liable to collect from employees and pay the IRS the full amount of the deferral.
• Best Practice – Employers who choose to defer taxes should consider providing a written explanation to employees and obtaining a signed opt in statement from employees.

We expect more clarification of the rules in the next few weeks.

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