2020 Tax Planning More Complex than Usual for Businesses

CARES Act and other pandemic-related tax provisions present important considerations for year-end planning

Changes in business operations, pandemic-related strategic pivots, telecommuting employees and the 880-page Coronavirus Aid, Relief and Economic Security (CARES) Act are just a few of the factors that may change how year-end tax planning looks for businesses this year. Now is the time to speak with your tax advisor in case there are decisions or plans your business needs to make before December 31st.

For example, several CARES Act provisions provide retroactive tax relief, so you may want to consider filing amended 2018 and 2019 returns, if you haven’t already.

And looking ahead, it may make sense to engage in scenario planning for possible 2021 tax changes. If you want to make any immediate changes based on the results of the election, you will only have a few weeks left in 2020 to do so.

Below are some other key considerations to address in planning for the 2020 tax year.

You may be able to take larger deductions for net operating losses

The Tax Cuts and Jobs Act (TCJA) of 2017 had stopped carryback of net operating losses (NOLs) that exceeded taxable income within a particular year. It also imposed an 80% of taxable income limitation on the use of NOLs arising in tax years beginning with 2018. The CARES Act gives temporary reprieve from both provisions:

• It grants a five-year carryback period for NOLs arising in tax years beginning January 1, 2018, and ending December 31, 2020.
• It also temporarily suspends the 80% of taxable income limitation on the use of NOLs, allowing taxpayers to fully offset taxable income during the allowed tax years, regardless of when the NOL was generated.

These two provisions mean businesses and individuals may wish to take advantage of the carryback by amending or modifying tax returns for tax years dating as far back as 2013.

Excess business losses limitation is temporarily waived

Business owners should pay attention to how changes to the excess business loss limitation may impact their individual tax return. For tax years 2018, 2019 and 2020, the CARES Act repealed limits imposed by the TCJA on deducting aggregate trade or business losses. It also changed how the overall limitation will be calculated starting in 2021. Knowing this will go into effect next year, you may wish to consider using your losses for this year, or retroactively for the two previous years.

Qualified improvement property is eligible for 100% bonus depreciation

Most non-structural improvements you make to the interior of a non-residential building are considered qualified improvement property (QIP). The CARES Act fixed a Congressional oversight and QIP is now back to being classified as having a 15-year depreciation (rather than a 39-year period). In addition to the shorter cost-recovery period, this also allows new QIP to be eligible for 100% bonus depreciation under provisions introduced in the TCJA.

These changes apply retroactively to property acquired and placed in service after December 31, 2017. This means that, in addition to changing your 2020 taxes, you may want to amend or refile your 2018 and 2019 taxes (if you haven’t already) to claim the extra depreciation you would have been able to claim if these provisions had been in place for those tax years.

Business interest expense deduction has increased

The Internal Revenue Code’s Section 163(j) limitation on allowable deductions for business interest expense has been increased to 50% of the taxpayer’s adjusted taxable income, for both 2019 and 2020 (after a reduction to 30% beginning in 2018). This CARES Act provision also allows the use of 2019’s adjusted taxable income to calculate the limitation for 2020. The 30% limit is set to return for the 2021 tax year.

Paycheck Protection Program loans introduce new tax considerations

As it stands right now, Paycheck Protection Program (PPP) loans that are forgiven will not count as taxable income. But businesses also cannot deduct any expenses paid with those funds. Business owners should be communicating regularly with their tax advisor regarding the tax treatment relating to any PPP loans, as guidance continues to be released.

Any loan modification or forgiveness may have tax implications

Speaking of loans, many businesses were able to work with debt providers to ease their obligations, defer payments or modify covenants. If you modified or refinanced debt, or if your lender changed loan covenants or terms, this may give rise to taxable income. Be sure your tax advisor knows about any changes to loans, even those that may seem minimal or trivial.

Consider any pandemic-relief credits you may not have taken advantage of

Are you aware of all stimulus-related tax credits? Talk with your tax advisor to find out if your business may qualify for either of these credits, and if there is any action you need to take before the end of the year:

• If you didn’t receive a PPP loan, consider whether you qualify for the CARES Act’s employee retention credit. This is a payroll tax credit of up to $5,000 per employee for employers that had to suspend operations due to COVID-19-related government orders or experienced a significant decline in gross receipts.
• If your business employs fewer than 500 people, you may be able to claim a payroll tax credit for employees who took mandated paid medical leave to quarantine or care for family members due to COVID-19. This payroll credit applies to your gross income for this year.

Look at payroll tax deposits and estimated tax payment calculations

Federal, state and local governments provided a bit of relief to businesses by allowing them to defer various tax payments, including income, sales and use, and payroll taxes. However, these deferrals can make it more complex to calculate upcoming estimated tax payments. Talk with your advisor about which payments you should make before year-end 2020 and to plan payments due during 2021.

Here are two areas to consider:

• The CARES Act allows employers to defer deposit and payment of their share of Social Security taxes due for the tax periods from March 27, 2020, through December 31, 2020, with no penalties. Even if you haven’t taken advantage of this provision yet, you may still be able to do so. In some cases, you may even be able to re-categorize previous deposits to defer additional Social Security taxes. You will need to report these deferrals on your employment tax return and, of course, you will need to pay the taxes within appropriate deadlines.
• In addition, an executive memorandum allows employers to defer withholding and paying the employee portion of Social Security taxes from wages earned between September 1, 2020, and December 31, 2020. Companies that elected to use this deferral will need to withhold and pay those taxes during 2021. IRS guidance puts the responsibility for these payments on employers, even for employees no longer working for the company. If you elected to defer this tax, you may want to inform your employees that, assuming there are no legislative changes, they will see smaller paychecks during 2021 as you withhold those funds and pay the taxes. The deadline for paying these deferred taxes without penalties is April 30, 2021.

Explore state and local tax impacts of the pandemic and relief efforts

Companies that moved their operations in response to the pandemic, that have employees working from home in states other than where their offices are located, or that saw significant shifts in where their sales occur may have new state and local tax implications to consider.

Businesses with employees who worked from home in other states for part of this year due to COVID-19 may have nexus in that state. This means you may have taxable income that must be apportioned to that state and need to file state tax returns, possibly where you haven’t done so in the past. You may also not have paid required estimated state taxes in those states.

Even if this isn’t a new tax filing state for your business, these work-from-home employees may increase the apportionment of income that is subject to that state’s taxes. A handful of states have issued guidance that employees in their states who are working from home only because of the pandemic will not impact nexus or the apportionment formula. Most states, however, haven’t issued any such guidance. Expect your telecommuters to impact nexus and apportionment in those states.

In addition, some states have adopted CARES Act provisions into their own tax codes, but not all have. So CARES Act-related relief may not apply to state tax codes.

Consult with your tax advisor for current information and what it means for your business.

Don’t overlook R&D tax credit

The federal R&D tax credit covers process development and experimentation, software development and new product development. The pandemic has caused many businesses to dramatically transform their operating models, and it’s a good idea to check with your tax advisor to see if your company qualifies for this dollar-for-dollar offset of income tax liability.

In addition, as of right now, 2021 will be the last year you can expense research and development costs, rather than amortize them.

Other tax considerations

Don’t abandon your usual tax planning in this unusual year. In addition to the areas above, other important tax considerations to think about before year-end include:

• If you haven’t already done so, consider whether it makes sense to accelerate disaster losses to 2019 under Section 165(i) of the Internal Revenue Code. This may give you faster access to much-needed cash and may create NOLs that you can carry back to earlier taxable years. If you choose to accelerate losses, you may be able to request a “quick refund” by filing Form 4466.
• Decide whether to acquire new assets that you can depreciate this year, or how you want to depreciate new assets you’ve already acquired. The ability to depreciate 100% of the basis of qualified “new to the taxpayer” property in the first year of ownership is expected to sunset after 2022. Take into account how any NOLs may affect this, as well as your expectation of potential changes to tax rates in 2021 and 2022.
• Maximize your deduction for qualified business income (QBI). Most likely, your tax advisor has already explored this area with you. The rules haven’t changed since last year.
• The information required by Schedule K-1, as well as several other forms, has expanded in recent years. This is a good time to touch base with your tax professional to get an idea of new information you may need to prepare. It’s also a good time to check whether you have current, signed, valid W-8s and W9-s from all partners, investors or lenders.
• States continue to expand their rules regarding collection of state sales taxes when doing business across state borders. Multi-state businesses need to put increasing emphasis on planning for state taxes.

Apply for PPP loan forgiveness

Finally, while this isn’t strictly a tax-planning issue, it may be the most important year-end task you undertake if you received a PPP loan.

If you haven’t already, talk with your tax and financial advisors about the best PPP forgiveness strategy for your business. Some businesses should apply for loan forgiveness as soon as they’ve spent the funds. Others may benefit from waiting for more clarification on forgiveness, either from their lender, from the U.S. Small Business Association (SBA) or from Congress. The SBA maintains a current FAQ on PPP loan forgiveness.

In a challenging year where it seems like everything has been complicated, it’s no surprise that tax planning for 2020 is also more complex. There’s a lot to consider before year-end. Contact your Kaufman Rossin tax advisor to learn more about what you can do now to minimize your 2020 tax bill and prepare for the 2021 tax season.