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.

Changes are in store this tax season for the more than 70 percent of filers in 2019 who reported information in Box 7 of Form 1099 MISC. Beginning for the tax year 2020 there is a new Form 1099 NEC to report nonemployee compensation. In the past, payments of at least $600 to attorneys, independent contractors, or directors, among others, were required to be reported on Form 1099-MISC. Other payments, such as rents, royalties, and prizes, also were reported on this same form, but in different boxes.

Starting tax year 2020, any business, regardless of size, that pays at least $600 for services performed in the course of their trade or business by a person who is not their employee is required to file Form 1099-NEC.

Why the Change?

Prior to tax year 2020, nonemployee compensation was reported in Box 7 on Form 1099-MISC. However, with the passing of the Protecting Americans from Tax Hikes (PATH) Act in 2015, the due date for reporting amounts in Box 7 was accelerated to Jan. 31, while the deadline for reporting most other information on Form 1099-MISC remained at Feb. 28, if filing on paper, and March 31, if filing electronically.

Here’s where things got problematic: If a filer submitted a batch of 1099-MISC forms to the IRS after Jan. 31 and any of the forms had an amount in Box 7, the IRS would send a late filing notice to the filer for the entire batch. The filer would then have to rectify the situation with the IRS, indicating which forms in the batch were actually filed late.

To alleviate this cumbersome process, the IRS reinstated Form 1099-NEC (last used tax year 1982) to report nonemployee compensation separately from other types of income reported on Form 1099-MISC, and imposed an earlier due date. Since Jan. 31, 2021 falls on a Sunday, Form 1099-NEC must be filed on or before Feb. 1, 2021, using either paper or electronic filing procedures.

As noted earlier, the reinstatement of Form 1099-NEC will be a blast from the past for many accountants, as the form was last used in the early 1980s when Ronald Reagan was president. The older version did, however, have fewer boxes to fill out compared with the new Form 1099-NEC.

Who Must File?

As previously stated, the new Form 1099-NEC impacts many businesses, filers ranging from small businesses to Fortune 500 companies. More specifically, the IRS indicates that businesses should file the new form for each person whom they have paid at least $600 in:

• Services performed by someone who is not their employee (including parts and materials) (box 1);
• Cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish (box 1); or
• Payments to an attorney for services (box 1).

Businesses must also file Form 1099-NEC for each person from whom they have withheld any federal income tax (report in box 4) under the backup withholding rules regardless of the amount of the payment.

It is important to file on time, with the correct information, to avoid penalties. The amount of the penalty, which can be as high as $280 per information return, is based on when the filer submits a correct information return. If the failure to file a correct information return is due to intentional disregard, the penalty is at least $560 per information return with no maximum penalty.

Elimination of 30-Day Extension

In addition to accelerating the due date for filing Form 1099 that includes nonemployee compensation (NEC) from Feb. 28 to Jan. 31, the IRS also eliminated the automatic 30-day extension. There may, however, be some relief for those impacted by COVID-19, as well as those impacted by the recent West Coast wildfires.

The IRS does allow for an extension to file if the filer meets one of the five criteria outlined on Form 8809 Application for Extension of Time To File Information Returns. Some of the criteria listed are:

• The filer suffered a catastrophic event in a federally declared disaster area that made the filer unable to resume operations or made necessary records unavailable;
• Fire, casualty, or natural disaster affected the operation of the filer; and
• Death, serious illness, or unavoidable absence of the individual responsible for filing the information returns affected the operation of the filer.

The Fate of Form 1099-MISC?

All of the other income typically reported by a filer on Form 1099-MISC will stay on that form. Many of the boxes, however, have been rearranged.

According to the IRS, changes in the reporting of income and the form’s box numbers are as follows:

• Payer made direct sales of $5,000 or more (checkbox) in box 7.
• Crop insurance proceeds are reported in box 9.
• Gross proceeds to an attorney are reported in box 10 (for settlements).
• Section 409A deferrals are reported in box 12.
• Non-qualified deferred compensation income is reported in box 14.
• Boxes 15, 16, and 17 report state taxes withheld, state identification number, and amount of income earned in the state, respectively.

​Form 1099-MISC must be filed by March 1, 2021, if filing on paper, or March 31, 2021, if filing electronically.

State Filing

It is important to note that e-filed Form 1099-NEC will not be forwarded to states. What does this mean? In September, the IRS released its annual Publication 1220, which revealed that the 1099 NEC will not be included in the IRS 1099 Combined Federal/State Filing Program (CF/SF).

Under the CF/SF Program, the IRS forwards data from a number of key forms to the appropriate states, but it will not do so for Form 1099-NEC. As a result, businesses could miss key state filing deadlines, leading to unexpected penalties. This means 1099-NEC filers will need to find a state filing option separate from the CF/SF Program.

If you need assistance or would like to engage our firm to help guide you through the reporting process, please contact us!

Special Reporting Required: The IRS requires special reporting for fringe benefits for S- Corporation owners who own more than 2% of the business. Certain family members including spouse, child, parent and grandparent of the S-Corporation owner and who works for the S-Corporation are also subject to the same taxability of fringe benefits.

What you need to do by December 9th: If you use a payroll service, you need to contact them and report certain health insurance, HSA, and auto information in early December in order to have it included on your 2020 W-2. Avoid costly amending of W-2’s and payroll returns.

Health Insurance and HSA Contributions

In order to deduct the cost of health insurance premiums paid by the business on behalf of you and your family you must do the following:

• Compute the amount of premium paid by the business on behalf of each shareholder for the preceding 12 month period. You can use actual premiums paid for January through November and estimate the December amount if necessary.
• Insurance premium to track includes:
  • Medical
  • Long Term Care
  • Medicare premiums paid

This amount must be reported in Box 1 and Box 14 of the W-2. It is not subject to Social Security or Medicare tax.

• HSA - employer contributions for applicable shareholder employees must be reported in Box 1 and Box 14 of the W-2. HSA contributions are not subject to Social Security or Medicare tax.

Personal Use of Company-owned Autos

Compute the value of the personal use of company autos and include this in Box 1, 3, and 5 of your W-2. This fringe benefit is subject to social security and Medicare tax.

Act Now

Failure to properly report these fringe benefits may result in the loss of these business deductions or additional costs to correct W-2s and payroll reports.

Maximize Qualified Business Income (QBI)

For 2020, the Qualified Business Income (QBI) deduction can be up to 20% of a pass-through entity owner’s QBI, subject to limitations that can apply at higher income levels and another restriction based on the owner’s taxable income. Because of the various limitations on the QBI deduction, tax planning moves (or non-moves) can have the side effect of increasing or decreasing your allowable QBI deduction.

The application of these rules can be complex. Please contact Shannon & Associates if you need assistance or have questions about this important year end reporting.

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