The SECURE Act of December 2019 and the CARES Act of March 2020, along with corresponding regulatory guidance, has created a mind-numbing amount of information to interpret and apply. This morning, our goal is to summarize changes to retirement plans, and to offer a few year-end tax tips.
Defined Benefit and Cash Balance Plans
Many of the smaller firms who sponsor DB/CB plans are professional service entities and similar firms who generate consistent and meaningful discretionary cash flow, even amid challenging times such as 2020. The purpose of plan design is to build significant tax-favored wealth over a number of years, for both owners and employees. Company owners often find they can set aside well into six figures annually per owner, on a tax-deductible basis.
The SECURE Act changed the deadlines for establishing a retirement plan. Effective for all plan years after December 31, 2019, meaning for 2020 and later years, establishing a qualified retirement plan now follows SEP IRA rules. This means that for those businesses whose calendar/tax year are the same, they may establish a defined contribution (i.e. profit-sharing) or defined benefit (i.e. cash balance) plan in 2021, up to the earlier of the filing of the business tax return, or the filing deadline, including extensions, which is September 15th.
Employer contribution deadlines generally follow tax-filing deadlines, including extensions. As noted, beginning in 2020, you as employer may now establish a plan for 2020 in 2021. You may also make contributions to the plan up to the filing deadline, including extensions, as long as those contributions are made prior to the filing of the business tax return. Note however, that any plan contributions made in 2021 for tax/plan year 2020 may be only employer contributions. Any employee deferrals, such as to a profit-sharing plan with a 401(k)-deferral feature, would need to have been made during calendar/tax/plan year 2020.
Last Minute Tax Reduction Strategies
If you trust Congress not to change the Roth rules, there is still time to complete a Roth conversion. Integrate this conversion with your other sources of income, so you understand the tax outcomes of the conversion.
Gifting Appreciated Stock
Give appreciated stock. In spite of an unpleasant first quarter in the stock market, stocks of many publicly traded companies have appreciated nicely over the last several years. Coordinate the transfer directly from your brokerage account to the brokerage account of the charity you are supporting. For shares given, which you have held more than a year, you receive a charitable contribution deduction for the market value of the shares.
Other Charitable Contributions
Under the CARES Act, for tax year 2020, a taxpayer may deduct $300 for cash contributions to a qualifying charity, whether or not they itemize their deductions. Further, a taxpayer may deduct up to 100% of adjusted gross income (AGI) for cash contributions to qualifying public charities. This provision does exclude contributions to donor-advised funds.
This can always be a good approach. However, if business revenue is off due to the year we have had, you may be better served actually pulling all revenue you can into 2020, and delaying paying expenses to 2021. If Biden is seated as president, and Senate runoffs give Democrats free reign, it is likely taxes will go up in the near future.
Any year-end tax reduction plans you have need to be initiated within the next few days. January is an excellent time to begin discussions of tax planning for 2021, 2022, and beyond.
If we can bring clarity to any of these ideas, or assist in any way, please reach out.