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. As we near year-end we want to remind you that there is a small window for last minute tax planning opportunities.
It’s possible that additional COVID-19 related tax changes could continue to be implemented as the year wraps up and into January 2021. As always, we’re paying close attention to the everchanging tax environment to discover tax planning opportunities that could put more cash in your pocket. In the meantime, here are some ideas to evaluate.
PPP Loans and Taxation
Currently the Internal Revenue Service considers the expenses paid by PPP loans to be nondeductible. This was not the intent of the CARES ACT and may be changed by Congress. See our website for current guidance to all matters related to PPP loans.
Planning 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.
Consider converting to cash basis of accounting for income tax purposes. Many businesses have previously been required to use the accrual basis of accounting, some companies may qualify to change to the cash basis of accounting, which can generate deductions in the year of change.
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/tax withholding-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
Even though the IRS continues to publish guidance on COVID-19 related developments, there are things you can still do ahead of year end to improve your tax situation. Please don’t hesitate to contact us we are here to help you.
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.