2020 has offered plenty of excitement, with viruses, civil unrest, and a presidential election, among other things. And in the last three years, there have been three major pieces of legislation, components of which impact our business and personal taxes. Following is a short summary of business and personal year-end tax planning tips. Space limitations allow us to share just enough information to create a conversation with your advisory team.
The Tax Cut and Jobs Act (TCJA) eliminated the corporate AMT but allowed businesses with unused AMT credits to claim them in tax years 2018 through 2020, with any remaining credits fully refundable in 2021. The CARES Act lets businesses claim all remaining credits in 2018 or 2019, opening the door to immediate 100% refunds for excess credits. Instead of amending a 2018 return, file Form 1139.
The TCJA limits the net operating loss deduction to 80% of taxable income, and NOLs can’t be carried back. Under the CARES Act, NOLs arising in 2018, 2019, or 2020 can be carried back five years to claim refunds in previous tax years. No taxable income limitation applies for years beginning before 2021.
Capital Asset Depreciation
The TCJA expanded bonus depreciation for capital assets. The CARES Act remedied a TCJA drafting error which left qualified improvement property (QIP) ineligible for bonus depreciation. For QIP purchased after September 27, 2017 and before January 1, 2023, businesses can deduct 100% of the cost of new and used QIP. QIP includes computer systems, purchased software, vehicles, machinery, equipment and office furniture. Beginning in 2023, the amount of bonus depreciation will drop 20% each year. Businesses can claim an immediate tax refund for bonus depreciation missed in 2018 and 2019. Section 179 expensing is available for several improvements to nonresidential real property, with the 2020 maximum deduction set at $1.04 million.
The TCJA generally limits the deduction for business interest expense to 30% of adjusted taxable income (ATI). The CARES Act allows C and S Corps to deduct up to 50% of their ATI for 2019 and 2020 tax years. It also allows businesses to use their 2019 ATI for both years, which should increase the amount of the deduction.
Payroll Tax Deferral
The CARES Act allows businesses and self-employed individuals to delay payment of the employer share (6.2%) of the Social Security payroll tax. Such taxpayers can pay the tax over the next two years, with the first half due by December 31, 2021, and the second half due by December 31, 2022. Note that generally, these payroll taxes cannot be deducted until paid, so there could be some benefit to paying them in 2020.
Income and Expense Timing
If Democrats control both houses of Congress, as well as the White House, it is likely that taxes will go up, perhaps as soon as 2021. In that case, it may be wise to accelerate income into 2020, and defer expenses into 2021. And given the current state of the election process, we may not know the answer to this question until January 2021.
The CARES Act temporarily raised the limit on charitable deductions for cash contributions to public charities from 60% of AGI to 100% of AGI. You can stack contributions, meaning you can give appreciated stock up to the deduction limit for appreciated securities, (20% or 30%), and then give cash thereafter. If your income is lower this year though, and you itemize, the tax impact of charitable gifts will be less this year. In short, your charitable giving approach for tax purposes will be specific to your household.
The CARES Act provides that for 2020, all taxpayers, whether they itemize or not, may take an “above the line” deduction for up to $300 of charitable cash gifts.
If your income is lower in 2020 than you expect it to be in future years, and if you trust Congress not to change the Roth rules, you may want to consider a Roth conversion. Funds converted from a traditional/rollover IRA to a Roth IRA are taxable as income in the year converted. Under current tax law, funds in a Roth IRA, subject to certain qualifications, are distributed tax-free.
Capital Gain Deferral
The TCJA created Qualified Opportunity Zones (QOZs) and their cousin, Qualified Opportunity Funds (QOFs). Taxation of realized gain, either short or long, can be deferred until 2026 by investing in a QOF. Under the guidelines, such gain, if held through the qualifying period, also gets a 10% step-up in basis. Most of the QOFs which hit the market in the first half of 2018 are now gone, and the viable long-term sponsors remain. We have identified two QOF sponsors who pass our due diligence screens, and make their offerings available at NAV, or without any sales or distribution charges.
Required Minimum Distributions
The CARES Act waived the requirement to take RMDs in 2020. For those age 70.5 or older, you may still make Qualified Charitable Distributions, or QCDs. QCDs allow you to fulfill charitable goals, without taking such distributions as income. If your goal is to continue to reduce the size of your IRA, in order to manage or reduce the size of future RMDs, you may want to consider a QCD in 2020. Note that the limit is $100,000.
Retirement Plan Contributions
Whether you have a number of employees or are self-employed, establishing or contributing to a retirement plan can both help you prepare for the future, and reduce current taxes. The CARES Act allows you to establish a retirement plan for 2020, in 2021. Historically, if you wanted to make tax-deductible contributions to a retirement plan in 2020, the various documents which confirm the establishment of the plan had to be signed in 2020,
There is much more we could write about. We have just scratched the surface with this short summary. If you would like to talk more about any of these topics, please reach out. You may reach me at firstname.lastname@example.org, or at 678.478.5781. You may also reach us at email@example.com.