The Small Business Administration (SBA) announced that the Paycheck Protection Program (PPP) reopened the week of January 11. If you’re fortunate to get a PPP loan to help during the COVID-19 crisis (or you received one last year), you may wonder about the tax consequences.
Background on the loans
In March of 2020, the CARES Act became law. It authorized the SBA to make loans to qualified businesses under certain circumstances. The law established the PPP, which provided up to 24 weeks of cash-flow assistance through 100% federally guaranteed loans to eligible recipients. Taxpayers could apply to have the loans forgiven to the extent their proceeds were used to maintain payroll during the COVID-19 pandemic and to cover certain other expenses.
At the end of 2020, the Consolidated Appropriations Act (CAA) was enacted to provide additional relief related to COVID-19. This law includes funding for more PPP loans, including a “second draw” for businesses that received a loan last year. It also allows businesses to claim a tax deduction for the ordinary and necessary expenses paid from the proceeds of PPP loans.
Second draw loans
The CAA permits certain smaller businesses who received a PPP loan and experienced a 25% reduction in gross receipts to take a PPP second draw loan of up to $2 million.
To qualify for a second draw loan, a taxpayer must have taken out an original PPP Loan. In addition, prior PPP borrowers must now meet the following conditions to be eligible:
- Employ no more than 300 employees per location,
- Have used or will use the full amount of their first PPP loan, and
- Demonstrate at least a 25% reduction in gross receipts in the first, second or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after Jan. 1, 2021, are eligible to utilize the gross receipts from the fourth quarter of 2020.
To be eligible for full PPP loan forgiveness, a business must generally spend at least 60% of the loan proceeds on qualifying payroll costs (including certain health care plan costs) and the remaining 40% on other qualifying expenses. These include mortgage interest, rent, utilities, eligible operations expenditures, supplier costs, worker personal protective equipment and other eligible expenses to help comply with COVID-19 health and safety guidelines or equivalent state and local guidelines.
Eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors and small agricultural co-operatives.
Deductibility of expenses paid by PPP loans
The CARES Act didn’t address whether expenses paid with the proceeds of PPP loans could be deducted on tax returns. Last year, the IRS took the position that these expenses weren’t deductible. However, the CAA provides that expenses paid from the proceeds of PPP loans are deductible.
Cancellation of debt income
Generally, when a lender reduces or cancels debt, it results in cancellation of debt (COD) income to the debtor. However, the forgiveness of PPP debt is excluded from gross income. Your tax attributes (net operating losses, credits, capital and passive activity loss carryovers, and basis) wouldn’t generally be reduced on account of this exclusion.
This only covers the basics of applying for PPP loans, as well as the tax implications. Contact us if you have questions or if you need assistance in the PPP loan application or forgiveness process.
The Internal Revenue Service recently issued the 2021 optional standard mileage rates. These rates, which adjust every year to account for inflation of fuel costs, vehicle cost and maintenance, and insurance rate increases, will once again affect the way a company reimburses their mobile workers. Specifically, the IRS mileage rate is a guideline that businesses use to calculate the deductible costs of operating an automobile for business, charitable, medical, or moving purposes. Beyond announcing the rate change, we have a few reminders and tips surrounding this reimbursement allowance.
As of January 1, 2021, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:
- 56 cents per mile for business miles driven, down 1.5 cents from 2020
- 16 cents per mile driven for medical or moving purposes, down 1 cent from 2020
- 14 cents per mile driven in service of charitable organizations; the mileage rate for service to a charitable organization is not alterable by the IRS. Instead, it must be changed by a Congress -passed statute.
Have you considered…
- Under the Tax Cuts and Jobs Act, employees are not permitted to write off unreimbursed business mileage. If your company does not make up for this reimbursement, it could face legal consequences.
- A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.
- Taxpayers also have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. The actual expense method often produces a significantly different result. You will want to talk with your CPA to determine which method yields the larger deduction.
The IRS rate was intended to function as a reimbursement cap. Today, the rate holds businesses accountable, but it doesn’t account for fluctuations in vehicle prices across city, county, and state lines. For companies whose employees use their vehicles for work, there is an alternative to the standard mileage rate. The Fixed and Variable Rate (FAVR) allowance preserves reimbursement equity and helps businesses avoid over- or underpayment to employees. To find out more about this IRS recommended reimbursement methodology or if you have any questions about the IRS Standard Mileage Rate, please contact one of our professionals today.
The employee retention tax credit (ERTC) is intended to provide liquidity to employers during the pandemic and was greatly expanded in the Consolidated Appropriations Act of 2021 thanks to Sections 206 and 207 of the Taxpayer Certainty and Disaster Relief Act portion, opening the doors to more businesses to be able to qualify for and receive this credit who are facing significant hardship as a result of the coronavirus pandemic. Many changes from the original credit were enacted including an expansion in the amount of credit and business eligibility, and how it plays with the Paycheck Protection Program (PPP).
Here’s what you need to know about this credit, how it works, and how to apply. Note that when a provision is designated as effective Jan. 1, 2021, it does not apply to any retroactive credit claims.
Who is eligible for the ERTC?
The following businesses and organizations engaged in a trade or business are eligible to qualify for the ERTC:
- For-profit businesses
- Tax-exempt organizations
- Certain government entities that are state or local-run (Effective Jan. 1, 2021, previously no government entity at any level was eligible):
- Colleges or universities
- Organizations providing medical or hospital care
- Certain organizations charted by Congress (such as Fannie Mae, FDIC, Federal Home Loan Banks and Federal Credit Unions)
How does my business qualify for the ERTC?
An eligible organization can qualify for the ERTC if:
- Their operations are fully or partially suspended due to a lockdown order, OR
- Their gross receipts are less than 80% for a quarter in 2021 or the immediately compared to the same quarter in 2019 (or 2020 if the business was not open in 2019) or, there is a 20% drop quarter-over-quarter when comparing Q1 of 2021 to Q4 of 2020 compared to Q4 of 2019.
The gross receipts test is Effective Jan. 1, 2021, this is an increase from the previous law and expands the threshold for eligible businesses.
Effective Jan. 1, 2021, businesses with 500 employees or less are eligible to claim the credit even if an employee is working during the first two quarters of 2021 (an increase in the threshold from 100 employees in the original law). For affiliated companies sharing more than 50% common ownership, the 500 count is aggregated.
What is the time period for the credit, and when can I start collecting?
The passage of the bill at the end of December extended the availability of the ERTC through the first two quarters of 2021, allowing for more relief as the pandemic continues on. Qualified wages paid after March 12, 2020, and before July 1, 2021, are eligible for the credit.
Additionally, the new law will allow for an advanced credit for companies with 500 or fewer employees, allowing these companies to monetize the credit before wages are paid. The amount is based on 70% of the average quarterly payroll for the same quarter in 2019, and if there is excess advance payment, companies will need to repay the credit to the government.
How much credit can I receive?
Effective Jan. 2021, 70% of qualified wages are eligible for the ERTC including the cost to continue providing health benefits (such as if an employee is on furlough). This is an increase from the 50% provided in the previous stimulus bill. The qualified wage limit was increased to $10,000 per quarter per employee for the first 2 quarters of 2020. Previously was $10,000 per employee for the entirety of 2020.
Also, effective Jan. 1, 2021, the credit maxes out at an aggregate $14,000 per employee, or $7,000 for the first two quarters of 2021, and is available even if the employer received the maximum credit for wages paid to the same employee in 2020. This is an increase from the $5,000 max in the previous bill.
Additionally, the credit is now available for certain pay raises including hazardous duty pay increases (previously not allowed and is retroactive).
How does my PPP loan factor in?
First and foremost, companies with PPP loans can now also claim the ERTC, and the change is retroactive to the effective date of the original law (March 12, 2020). Key to note is that the ERTC cannot be applied toward wages covered by the PPP.
If, for example, your business received a PPP loan in 2020 and paid qualified wages in excess of the PPP loan amount, you could qualify and apply for the ERTC through an amended employment tax return (Forms 941X). This also applies to affiliate companies related to a PPP borrower. Furthermore, if your PPP payroll costs are not forgiven, those same payroll costs can be applied toward ERTC qualified wages. Your accountant can help you calculate and designate these costs.
Claiming the ERTC, with or without a PPP loan, requires careful calculation and documentation. Contact us for assistance with this credit.
The U.S. Small Business Administration (SBA) and Treasury have announced that lenders with $1 billion or less in assets will be able to open applications for the next round of Paycheck Protection Program (PPP) funding starting Friday, Jan. 15 at 9 a.m. ET. Both first and second-draw loans will be able to apply at that time. For large lenders, the application opens on Tuesday, Jan. 19 for first and second-draw loans.
Community financial institutions (CFIs) began accepting applications for underserved small businesses on Jan. 11 for first-draw loans and Jan. 13 for second-draw loans. More than 9,100 applications were submitted so far totaling over $1.4 billion of the $284.5 billion available in this round of funding.
As a reminder, the second round of PPP funding expanded certain provisions of the original program including:
- Expanded eligibility for nonprofits, independent contractors/sole proprietors/self-employed individuals, certain businesses eligible for other SBA 7(a) loans, accommodation and food services, business leagues with a Sec. 501(c)(6) designation, and news/nonprofit public broadcasting organizations.
- Expanded eligible costs including COVID-related worker protection and facility modifications; property damage costs related to public disturbances; suppliers expenditures essential to operations; operating expenditures for software/cloud computing services essential for running the business.
- Simplified applications for first-draw loans of $150,000 or less.
- Repeal of Economic Injury Disaster Loan advances (EIDL) deduction from forgiveness amount.
- Repeal of duo claims on a PPP loan and the employee retention tax credit program – Businesses can qualify for both.
- Allowance for second-draw PPP loans if a business has maxed out the first, has fewer than 300 employees, and a 25% reduction in revenue.
- Allowance of expenses paid with a PPP loan to be tax-deductible.
You can read more about the provisions of the second round of PPP funding in our blog. Contact us for assistance with a first or second-draw PPP loan and your forgiveness application.
Two new interim final rules for the Paycheck Protection Program (PPP) have been released from the Small Business Administration (SBA) and Treasury in response to the changes and second round of funding enacted by the relief portion of the Consolidated Appropriations Act signed at the end of December.
Changes in provisions for first-draw PPP loans
First-time borrowers of PPP forgivable loans received consolidated rules in the IFR “Business Loan Program Temporary Changes; Paycheck Protection Program as Amended” as well as an outline of changes made by the Act. Here’s what this rule clarified:
- The authority to make PPP loans was extended to March 31, 2021.
- Eligibility was expanded to:
- Businesses that are also eligible for other SBA 7(a) loans with 500 or fewer employees.
- Independent contractors, sole proprietors, certain self-employed individuals.
- Nonprofits, including churches.
- Accommodation and food services – Fewer than 500 employees per location.
- Business leagues, chambers of commerce, visitor’s bureaus and others (not sports leagues) that fall under the Sec. 501(c)(6) designation – Must have fewer than 300 employees, less than 15% of receipts from lobbying, and less than 15% of activity and less than $1 million spent toward lobbying.
- Certain news organizations and nonprofit public broadcasting organizations with no more than 500 employees.
- Publicly traded companies or businesses with direct or indirect control by the president, vice president, head of executive departments, or members of Congress (including spouses) are now ineligible.
- Qualifying payroll documentation may include payroll records; payroll tax filings; Form 1099-MISC; Form 1040, Schedule C or Schedule F; sole proprietorship income and expenses; bank records.
- Hotels and restaurants can receive loans up to 3.5 times their average payroll cost (2.5 times for every other industry).
- Maximum loan amount is $10 million.
- Additional eligible costs include COVID-related worker protection and facility modifications; property damage costs related to public disturbances; suppliers expenditures essential to operations; operating expenditures for software/cloud computing services essential for running the business.
- First-draw loans of $150,000 or less can use a simplified forgiveness application (form is due to be released by Jan. 20).
Additionally, specific funds were set aside for minority, underserved, veteran, and women-owned businesses. When the PPP portal reopens on Monday, Jan. 11, lenders for underserved communities will have exclusive access for two days for first-draw loans and will be able to offer second-draw loans on Wednesday, Jan. 13. The portal will be open to all borrowers following these exclusive access days.
New provisions for second-draw PPP loans
In the IFR “Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans,” much-awaited guidance was released for those looking to apply for a second PPP loan. Here’s what it said:
Eligible borrowers must
- Have 300 or fewer employees
- Have used or will use the full amount of their first PPP loan on or before expected date of second loan disbursement, and the full amount must have been used on eligible expenses.
- Have had at least 25% reduction in revenue for all or part of 2020 compared to the same time in 2019. Gross receipts can be used for calculation, or annual tax forms can be used for those in operation for all four quarters of 2020.
- The gross receipts used for calculation were defined to include all revenue regardless of form in which it was received or accrued or the source.
- First draw PPP loans should not be included in 2020 gross receipts.
New PPP application forms have not yet been released for first or second-draw loans. We will continue to update you as guidance, portals, and applications become available. Contact us for assistance with your application for a first or second-draw loan or forgiveness.
The U.S. House of Representatives and U.S. Senate have passed the Coronavirus Response & Relief Supplemental Appropriations Act, and President Trump is expected to sign the bill immediately. The agreement comes after weeks of negotiations and two funding extensions to keep Congress open until a bill was passed with a $1.4 trillion government-wide funding plan. The $900 billion coronavirus relief portion includes another round of Paycheck Protection Program (PPP) funding, extended unemployment benefits, and direct payments to taxpayers. Here’s an overview of the key provisions in the bill.
Updates to the PPP and changes for second round
The Act designates $267.5 billion for this round of PPP funding, and the program specifically sets aside $25 billion for businesses with 10 employees or less as of Feb. 15, 2020. Regulations for this round of PPP funding are required to be released within 10 days of enactment.
Borrowers who received PPP funding in the first round following the CARES Act will receive some additional updates to their existing PPP loans. Borrowers who would like to adjust their requested loan amount based on these updated regulations may do so, provided they have not yet received forgiveness. Here are the key updates:
- More expenses are eligible – Covered operations expenditures (including business software and cloud computing services), property damage costs (costs incurred during public disturbances in 2020 not covered by insurance), supplier costs (that are essential to operations), and worker protection expenditures (to comply with HHS, CDC, or OSHA requirements) would be eligible for forgiveness. These amendments would not apply to loans that have already been forgiven.
- Tax deductions on related expenses are allowed – The bill reverses an earlier ruling and makes expenses deductible. It also confirms forgiveness is non-taxable.
- Loans up to $150,000 get a simplified forgiveness application process – Borrowers with loans up to $150,000 will get one-page online or paper form with borrower certifications of the number employees covered by the loan, the estimated amount spent on payroll, and the total amount of the loan. Borrowers must still maintain appropriate documentation.
- Borrowers do not have to deduct EIDL advance – Previously, EIDL advances were to be deducted from the PPP forgiveness amount, but that was repealed.
- PPP borrowers can also get an Employee Retention Credit – Wages used for ERC will not be eligible for PPP forgiveness.
The second round of funding provided by this Act has a few key differences from the first round in the CARES Act. Key to note is that borrowers can apply for a second PPP loan through this program if they have fully used their first PPP loan and meet the employer size and gross revenue criteria listed below. PPP loans in this round are capped at $2 million. Here are the key differences:
- Changes to employer size and gross revenue qualifications – Only businesses with up to 300 employees (down from 500 employees) and a gross revenue decline by at least 25% for any quarter of 2020 compared to the same quarter in 2019 will qualify for this round.
- Changes to loan limits – The loan amount is limited to 2.5 times of the average payroll for the last 12 months through date of application or 2019 and is limited to $2 million. Businesses that are part of the NAICS code beginning with 72 – Accommodation and Food Services – are limited to 3.5 times payroll for the 1-year period or 2019 and limited to $2 million.
- Changes to eligible nonprofits – 501(c)(6)s now qualify – These organizations must have 150 employees or fewer, gross receipts from lobbying activities must total less than 15% or $1 million, and lobbying activities cannot comprise more than 15% of total activities.
- More groups can apply for first-time assistance – Other groups that can apply for first-time assistance through this round of PPP funding include businesses eligible for other SBA 7(a) loans with fewer than 500 employees, sole proprietors, independent contractors, self-employed individuals, and nonprofits (including churches).
As with the first round of PPP loans, 60% of the funds must be spent on payroll over the covered period (8 or 24 weeks).
Other provisions affecting businesses
- $13.5 billion for Economic Injury Disaster Loans (EIDLs)
- $15 billion in grants for theaters and live venues – Theaters and live venues must have been operational prior to Feb. 29, 2020, have at least a 25% reduction in gross revenue, and they plan to resume operations following closures. Grants can be up to $10 million per eligible business, with preference given to venues with higher revenue losses. Certain characteristics apply for live venue spaces, movie theaters, and museums, so work with your CPA to determine eligibility.
- Employer tax credits for those offering paid sick leave have been extended to Mar. 31, 2021, for employers who voluntarily choose to expand paid emergency leave. Otherwise, the requirements set forth by the Families First Coronavirus Response Act (FFCRA) expire Dec. 31, 2020.
- Extension of time for employers to pay back deferred payroll taxes till the end of 2021 instead of Apr. 30, 2021.
- $10 billion for childcare assistance – This includes supplemental assistance for childcare providers to assist with fixed costs and operating expenses.
Provisions affecting individuals
- Direct stimulus payment of $600 per adult and child with the same phase out thresholds as the CARES Act ($150,000 if married filing a joint return, $112,500 if filing as head of household, or $75,000 for individuals). Payments are expected to start arriving as early as the week of Dec. 28, 2020.
- Changes and extensions to unemployment including:
- $300 in enhanced unemployment benefits for unemployment beginning after Dec. 26, 2020, through Mar. 14, 2021, fully financed by the federal government, instead of split between the states and federal government.
- Extension of the Pandemic Unemployment Assistance program for gig workers, independent contractors, and the self-employed.
- Extension of the Pandemic Emergency Unemployment Compensation program which protects workers who exhaust state benefits with an additional 13 weeks.
- $25 billion for rental assistance.
- An extension of the eviction moratorium through Jan. 31, 2021.
- $13 billion for enhanced Supplemental Nutrition Assistance Program (SNAP) benefits including funding a 15% increase in benefits for 6 months to recipients.
- $81.8 billion allocated to colleges and schools to assist with pandemic-related changes in operations.
- $45 billion for transportation including $2 billion for airports and $15 billion for passenger airline workers.
- $7 billion for increased broadband access to assist with remote business operations and learning.
- $28 billion in funding for vaccine purchase and distribution.
- $22 billion for state, local, tribal, and territorial governments for health-related expenses like testing.
Further guidance and regulations are expected in various components of the bill and are due in periods of 10 to 45 days depending on the issue and reporting agency. Not included in the bill was aid for state and local governments, an agreement on liability protections for businesses, nor a continued freeze on payments and interest for federal student loans set to expire for many in February. Lawmakers have indicated they expect to pass another stimulus bill addressing some of these issues in early 2021.
More guidance and updates are expected on the Coronavirus Response & Relief Supplemental Appropriations Act. Stay tuned for more details in the days and weeks to come.
Please note that information and guidance on the PPP loan program is changing on a daily basis. The information provided in this article is current as of December 22, 2020. It is intended for general informational purposes only. Consult with your financial advisor about your specific situation.
The pandemic created by the novel coronavirus has drastically changed the way we live and work. As more businesses are forced to send their employees home, work-from-home life has become a mainstay especially in knowledge-based jobs (jobs that do not require physical labor), and many of these industries are not going back to the workplace anytime soon. This can create wrinkles for both employers and employees when it comes to their tax situations.
Here’s what employers and employees need to know about remote work and the impact it can have on taxes.
Tax and labor considerations for employers with remote employees
Nexus – Employers who have transitioned their workforce to be remote must be conscious of potential nexus implications due to any employees now working from another state. Working out of state from the employer can create physical nexus which means the employer will be responsible for the taxes imposed from the employee’s location. This could include taxes on income, gross receipts, and sales and use from both the city and county level.
Some states have waived these nexus rules or have adjusted in light of COVID-19 including Minnesota, Indiana, Ohio, New Jersey, Mississippi, Pennsylvania, North Dakota, and the District of Columbia. Check with your CPA to ensure you’re following your state’s remote worker nexus law.
Labor and employment law – Changes in an employee’s location across state lines can result in new wage and hour rules, termination of employment considerations, noncompetition agreements, trade secrets protections, and paid sick and family leave rules. Employers will want to be mindful of worker’s compensation insurance as states usually require employers to register and obtain premiums to cover the employee in that state. Additionally, unemployment insurance is also required by states for employees even if the employer operates in a different state.
Remote worker supplies – Employers who purchased items and provided them to workers in order to move operations remotely may deduct those expenses on their tax return. As these supplies are usually purchased for non-compensatory business reasons, employees do not need to pay taxes on them. Employers who reimbursed employees for purchased supplies deemed “ordinary and necessary” should have accountability plans and policies in place to protect the employee from taxation.
Consistent and accurate communication with employees during this time is key in order to avoid employer and employee tax violations as tax updates continue to be released regarding nexus and tax responsibilities. Be mindful that employee tax obligations are not the employer’s responsibility, so remind your employees to stay vigilant about their personal tax situation.
Tax implications for employees working from home
Double-taxation – Double-taxation can be a large burden for employees living in one state and working in another. Double-taxation occurs when the resident state doesn’t provide and employee with a credit on their return for taxes paid to their employer’s state. States where this can occur include New York, Arkansas, Connecticut, Delaware, Nebraska, and Pennsylvania.
Home office deductions – The Tax Cuts and Jobs Act (TCJA) of 2017 removed the itemized home office deduction for unreimbursed expenses exceeding 2% of AGI. This means that even though new remote employees have had to procure supplies during the pandemic and they were not either directly purchased by the employer or the employee was not reimbursed, those expenses are not tax-deductible.
Self-employed individuals are still eligible for the home office deduction if they are purchasing their own supplies. If a contracting client purchases supplies for them, those would be tax-deductible for the client, but not the self-employed individual.
Relocation – If you’ve permanently relocated across state lines during the pandemic, you will need to file tax returns for both states in 2021. Even temporary relocations of six months or longer may require tax returns to be filed in two states. It is likely states will be monitoring these moves closely in order to recover lost revenue.
Employers who have never operated with remote workers prior to the pandemic could face significant headaches come tax time. Likewise, employees who are working in one state and living in another could face large tax bills in 2021. For assistance with your obligations as an employer or individual taxpayer, reach out to us.
On November 18, 2020, the Internal Revenue Service issued Revenue Ruling 2020-27 which provides needed clarity on a taxpayers’ ability to deduct eligible expenses for Paycheck Protection Program (PPP) loan forgiveness.
The Ruling notes that a taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.
What if forgiveness is denied, in whole or part, or not requested?
In conjunction with the Ruling, the IRS issued Revenue Procedure 2020-51 to outline the steps for when:
1.) The eligible expenses are paid or incurred during the taxpayer’s 2020 taxable year,
2.) The taxpayer receives a covered loan guaranteed under the PPP, which at the end of the taxpayer’s 2020 taxable year the taxpayer expects to be forgiven in a subsequent taxable year, and
3.) In a subsequent taxable year, the taxpayer’s request for forgiveness of the covered loan is denied, in whole or in part, or the taxpayer decides never to request forgiveness of the covered loan.
The Rev Procedure provides for two safe harbors for taxpayers in the event forgiveness is denied, in whole or in part, or otherwise not requested that would allow for the deduction of expenses in either the 2020 or a subsequent tax year.
Questions we still have
While the Ruling provides information on the deductibility of expenses and the tactical approach for borrowers whose forgiveness is denied or not requested, additional clarification is still needed. This guidance does not address the order in which the eligible expenses (payroll, rent, utilities and mortgage interest) lose the ability to be deducted.
Further, the guidance does not address other matters that could have significant tax implications including, but not limited to, the impact on the following:
- Qualified business income deduction (Section 199A)
- Research and development credits
- Interest deduction limitation (Section 163(j))
Need Assistance in Choosing the Right PPP Loan Forgiveness Application?
We have put together a flowchart that can help: How to Select the Right Loan Forgiveness Application
This year has been unique and beyond comparison in many ways, and tax planning is just one of the implications of current events. Both individual and business taxes have the potential to be significantly impacted by the various legislation that has passed like the FFCRA and the CARES Act, the loan programs made available like the PPP and the EIDL, and the unemployment/stimulus programs that touched many Americans.
It’s imperative that we take into account all these potential factors when implementing your tax plan for 2020. In this article, we’ll take a look at the main areas to consider, both common and pandemic-related, when planning for 2020 year-end taxes.
Common and pandemic-related tax planning items for businesses to consider in 2020
- Accelerate AMT refunds – The CARES Act has accelerated the alternative minimum tax following changes made by the Tax Cuts & Jobs Act. Corporations can claim all remaining credits in 2018 or 2019 thus allowing for filing of quick refunds.
- Use current losses for quick refunds – The CARES Act allows businesses to claim immediate refunds by using current losses against past income, for example.
- Submit a retroactive refund for bonus depreciation – Businesses can now deduct qualified improvements dating back to Jan. 1, 2018, thanks to a fix made by the CARES Act. This could offer a quick refund.
- Claim quick disaster loss refunds – Nearly every U.S. business is eligible for disaster-related refunds from losses in 2020 on an amended 2019 return for a quicker refund.
- Time out your payroll tax deduction – While the CARES Act allows employers to defer paying their share of Social Security taxes, you should review the best strategy with your accountant. In some cases, it’s better to pay on time to take a loss. In others, it provides a liquidity benefit.
- Maximize generous Section 179 deduction rules – For qualifying property placed in service in tax years beginning in 2020, the maximum Section 179 deduction is $1.04 million. The Section 179 deduction phase-out threshold amount is $2.59 million.
- Understand your PPP obligations – PPP loan forgiveness may be excluded from gross income, but how to treat expenses related to PPP loans is still in question. Does the taxability of these expenses come into play in 2020, or not until 2021 when a loan is forgiven? This can impact estimated tax payments and how to treat nondeductible expenses once a decision is made.
- Deduct EIDL grant expenses – EIDL grant funds are believed at this point to be considered taxable income but expenses related to this grant would be deductible.
- Claim any employment retention tax credits – These can be claimed now, but you cannot have a PPP loan and receive employment retention credits.
Common and pandemic-related tax planning items for individuals to consider in 2020
- Be mindful of long-term capital gain taxes from sales of assets as these could also impact the 3.8% tax on net investment income. If you didn’t make much income in 2020, consider harvesting some long-term gains, especially if you qualify for the 0% capital gains tax bracket (under $80,000 MFJ, $40,000 single filer).
- Postpone income and accelerate deductions – Check on the status of your current and projected income for 2020 and 2021 to see if you’ll be pushed into a higher tax bracket. Defer bonuses from employers if necessary, and if self-employed, postpone income by postponing billing. It may also be possible that accelerating income is the appropriate path for you to lock in lower tax rates.
- Convert traditional IRAs to Roth IRAs – Be mindful of the new distribution rules for IRA beneficiaries as well as the ability to continue to make IRA contributions after age 70½ if there is enough earned income at play.
- Bunch deductions if necessary/appropriate – Consider bunching charitable contributions (by using a donor advised fund or charitable lead trust) and medical deductions as there are certain thresholds only available for 2020. Thirty regularly expiring provisions are also coming with 2020 including tuition/fees deduction and mortgage insurance premium deduction among others.
- Make your year-end gifts as interest rates are low (expected to continue in 2021).
- Account for your stimulus payment – Stimulus payments are considered an advance on your 2020 tax credit, so you may see a smaller return next year.
- Pay taxes now on your unemployment income – Unemployment benefits are taxable on the federal level so ensure you’re taking these taxes out of your payments or saving to make a payment. Note that states have varying tax treatment of unemployment income.
- Consider taking gains and paying more in tax now if you’re in a good financial position – This is contrary to the usual advice, however given our current historically low rates and a large and accelerating national debt, higher tax rates seem inevitable. For example, paying a 20% LTCG tax now could be very advantageous for a high–income filer who might be stuck paying at their ordinary rates on capital gains in the future.
- Exercise non-qualified stock options – Biden has proposed not only a rate increase, but also a FICA increase on high income taxpayers. So, corporate executives might consider exercising the NQSOs now to avoid getting hit with higher rate and FICA in the future.
As mentioned in our previous article – Tax planning considerations: Election results, sunset provisions – changes to the tax code in the next two to four years may still be imminent depending on the finalizations of certain Senate elections. If those changes become a likely scenario, some adjustments may still be possible in this year’s tax plan to account for those potential tax code changes. Work with your CPA to have a plan for all scenarios.
According to news outlets, as of this writing, Joe Biden will be the president-elect of the U.S. following the Electoral College vote on Dec. 14. Vote counting is still ongoing and election results have not yet been certified, but this news may have some taxpayers wondering what changes, if any, they should make in their tax planning to close out an eventful tax year.
The likelihood of a major tax overhaul in the next two years is up in the air as the Senate is not yet decided and may not be until two Georgia run-off elections in January 2021. If Republicans retain the majority, it’s likely there won’t be many changes, but that doesn’t completely lock out any potential adjustments that could come in the next two to four years. Items of agreement on tax policy exist between both parties such as increasing the child tax credit. However, with provisions of the Tax Cuts and Jobs Act (TCJA) set to sunset in 2026, updates to the tax code will be on the horizon by the next election.
Additionally, if the Republican Party indeed holds onto a 51-vote majority in the Senate, it is not unreasonable to imagine a legislative vote in which 2 republican senators vote against the majority of the Republican party to push a tax legislation bill through to the President. Accordingly, between the possibility of a loss of Republican control in 2 to 4 years, the possibility of 2 Republicans voting for a tax reform bill, and the 2026 TCJA sunset, it is highly unlikely tax laws will become more favorable to taxpayers in the in future; thus, we believe there is an urgency to plan carefully and diligently in the last weeks of 2020.
In this article, we’ll examine the key points of the President-elect‘s tax plan, the sunsetting TCJA provisions, and what to keep in mind as you execute your tax plan to close out the year.
High-level overview of the President-elect Biden’s tax plan
President-elect Biden has laid out several of his tax plans the past year on the campaign trail. Here’s what we know based on what he’s shared.
- Increase the top tax rate on ordinary income for individuals with taxable income over $400,000 to 39.6%
- Tax long-term capital gains at ordinary income rates for those with taxable income over $1 million
- Cap the value of itemized deductions at 28% for those with incomes over $400,000
- Increase the child tax credit to $3,000 for children 6-17 years of age, and increase to $3,600 for children under age 6, make credit fully refundable
- Increase tax preferences for contributions to 401(k) plans and IRAs for middle-income taxpayers
- Replace deduction with a refundable tax credit for worker contributions to traditional IRAs and defined-contribution pensions
- Increase tax benefits for the purchase of long-term care insurance using retirement savings for older Americans
- Raise eligibility limits on health care premium tax credits and increase the amount of the credit
- Repeal the per-manufacturer cap on electric vehicle tax credits, make credit permanent, phase out credit for those with income above $250,000
- Reinstate solar investment credit and tax credits for energy efficiency in residences
- Phase out the qualified business income (QBI) deduction for those with income greater than $400,000
- Expand Social Security tax by increasing the maximum threshold from $137,000 to $400,000 over time
- Increase the corporate tax rate to 28%
- Add a 15% minimum tax on “book” income
- Offer tax credits to offset costs of workplace retirement plans for small businesses
- Establish a refundable tax credit for companies and nonprofits who provide full health benefits to all workers during a period of work hour reductions
- Eliminate certain tax subsidies for oil, gas, and coal production, enhance tax incentives for carbon capture use and storage, establish tax credits and subsidies for low-carbon manufacturing
- Expand tax deductions for commercial buildings with certain environmentally friendly investments
TCJA provisions to sunset in 2026
In addition to the President-elect’s plans, the TCJA is still in the spotlight. The TCJA was the most significant tax overhaul in decades when it was passed in 2017. However, as is the nature when dealing with budgetary constraints, many of the provisions of the TJCA are scheduled to sunset by 2026. Below we’ve highlighted a few of the anticipated changes.
For businesses, approximately $4 trillion is expected in new taxes over the next 10 years as provisions begin to sunset including changes to:
- Alternative Minimum Tax (AMT)
- Elimination or scale back of Section 199
- Capital gains
- Payroll taxes
- Bonus depreciation
For individuals, changes are coming for:
- Marginal tax rates for upper-income taxpayers
- Caps on itemized deductions
- Wealth taxes
- Childcare/family caregiving
- Renter’s credits/first-time homeowner credit
Considerations for 2020 year-end tax planning
It’s important to note that the above considerations are not an exhaustive list of tax items to review as we close 2020. Work with us to have a proactive plan in place that takes into account various potential scenarios that could manifest in the coming weeks and months. In our follow-up article – 2020 tax planning considerations for businesses, individuals – we’ve laid out some of the key provisions to take into account as you work with us on your end–of–year tax planning.