2020 Year-End Planning for Businesses

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2020 Year-End Planning for Business

As we approach the end of an eventful year, it is important to take some time to think of planning moves that may help lower your business’s 2020 income tax bill.

We continue to implement the Tax Cuts and Jobs Act of 2017 (TJCA) which contained major changes in tax rules for businesses and 2020 was not lacking of its own expansive legislative action. The passage of the SECURE Act (Dec 2019) and the CARES Act (March 2020) have added some additional opportunities as the purpose of the legislation was widely viewed as economic relief to businesses as well as individuals.

The CARES Act’s Payroll Protection Program stimulus program has grown in complexity.  As of November 18th, it is the Treasury Department’s position that expenses used to request forgiveness of a PPP loan are not deductible in the period expended if you “reasonably expect” you will receive forgiveness of the PPP loan. You should take this into account when estimating your business taxable income for 2020. Further, this position maybe reversed if Congress takes action to provide for deductibility of PPP related expenses retroactively.

We would be remiss if we failed to consider the potential tax changes that may result in light of the elections.  Although we wait for certification of the presidential election results, there has been some focus on the Biden administration’s income tax proposals which have been reported to include the following:

  • Restoring the individual top tax rate of 39.6% for individual earnings in excess of $400,000 (currently 37%)
  • Increase in the corporate income tax rate from 21% to 28%
  • Increase in capital gains tax rates for top income tax bracket(s)
  • Phasing out of the Qualified Business Income Deduction (see below) for individuals with earnings in excess of $400,000
  • Business tax credit for businesses that experience workforce layoffs or closure
  • Business tax credit for implementing workplace retirement plans

You may want to consider recognizing taxable income in the current year where rates are at historic lows versus deferring into later years where income tax rates could be higher under a new administration. Although this may be speculative at the current moment, maximizing the use of current low tax brackets may be a useful planning tool to free up needed cash flow in a year with much uncertainty.

Below we have compiled a list of items that may be helpful if taken into account before the end of 2020.  Please review the following list and contact us to discuss the benefit and/or your eligibility before you consider taking any action to save or defer taxes.

  • 20% Qualified Business Income deduction. As a result of TCJA, partnerships, S corporations, sole proprietorships and, in some instances, rental activities may qualify for a deduction of 20% of their passthrough income.  The “Qualified Business Income (QBI)” deduction is subject to many limitations including the type of business, wages paid by the business, basis of your property assets, and total taxable income. However, most taxpayers with taxable income below $163,300 (single) and $326,600 (married filing joint) will not be subject to these limitations and will qualify for the deduction.  Careful planning and analysis is needed to maximize this deduction for your partners, shareholders, or other members.
  • Consider timing of purchases of business capital investments: Businesses can consider investing in business assets that qualify for 100% bonus first year depreciation if acquired and placed in service in 2020.  Additionally, IRC Section 179 expensing thresholds have been increased to $1,040,000 annually, phasing out at $2,590,000 in total assets placed in service in 2020. Although certain limitations still apply (i.e. automobiles), these provisions greatly expand most businesses’ ability to recover tax benefits from its capital investments immediately.
    • Passenger automobiles acquired and placed in service during 2020 are generally subject to first-year automobile bonus depreciation limits of $8,000.  Alternatively, an SUV, truck, or van may qualify for a more generous first-year bonus depreciation allowance.
    • Accelerated depreciation on leasehold improvements.  Following the TCJA, qualified leasehold improvements were subject to a 39 year depreciation period. With the CARES Act, this depreciation period was reduced to 15 years and the improvements are eligible for bonus depreciation (a larger first year write off).
  • Retirement contributions and new plan credits: Consider your ability to fund and to what level you can accrue future contributions to retirement accounts that qualify for a business deduction in 2020. If you haven’t done so already, consider establishing a retirement plan which can NOW be adopted up to the due date (including extensions) of the tax return.  The SECURE Act introduced income tax credits for the establishment of new plans as well as for implementation of employee automatic enrollment policies. These credits can be helpful to recover some of the initial implementation costs. Consideration must be given to which plans may best suit your needs, the needs of the organization, and its employee(s).
  • Net Operating Loss limitation rules. The CARES Act removed the taxable income limitation placed on the deductibility of NOL previously set at 80% of taxable income.  This has liberalized your ability to use these losses to offset current year taxable income and consideration should be given to accelerating income into the current year to maximize its use. Further, the CARES Act restored NOL carryback rules temporarily for tax years 2017 to 2020 which may create an opportunity for amendments to prior years to request refunds of previously paid taxes.
  • Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. In general, your ability to deduct losses from a partnership or S corporation is limited to your basis in your investment, including certain loans you have made or have guaranteed. If you anticipate losses in the current year, you may consider contributing cash or other assets or making a loan to your company to increase your basis sufficiently to deduct a business loss.
  • Excess business loss limitation rules.  The CARES Act suspended the application of excess business loss rules (IRC Sec 461) and retroactively suspended these rules for 2018 and 2019. If subject to these rules in prior years, consideration should be given to possible amendments as well as recognition of excess losses in 2020.  Trade or business losses in excess of $262,000 for single taxpayers ($524,000 married filing a joint tax return) over the total amount of trade or business income may not be deductible in 2021 (projected thresholds).

Other items to consider in year end planning

  • Consider accelerating any expenses or capital purchases before year end to minimize overall taxable income.
  • Consider any opportunities to defer income into January 2021 or accelerate income into December 2020 based on your business circumstances and expectations.
  • Consider any benefits to be derived from implementing a change in accounting method such as from the accrual to cash basis of accounting (or vice versa).
  • Corporations need to determine the amount of reasonable compensation they pay to officers annually, and consider the relationship to the amount of distributions/dividends paid.
  • Determine any deductible accrued bonuses that may be payable in early 2020.
  • Determine the company’s or individual partner’s/shareholder’s need to make estimated tax payments to avoid underpayment penalties.
  • Consider allowances for employment or income tax credits for paid family and medical leave, hiring of “disadvantaged workers”, or similar employee retention programs.

We strive to provide you with applicable and valuable tax planning opportunities although subsequent developments or a change by the taxing authorities may affect advice we provide.

We are happy to discuss any of the above items with you further and tailor a tax strategy that will work best for you; please contact us with any questions you may have.