Between the political environment and the COVID-19 pandemic and its attendant stimulus packages, this year has seen more than its share of uncertainty around tax – which makes year-end tax planning all the more crucial.
Businesses of all sizes been dealt a tough hand. Having the right tax strategy will help businesses navigate this time of historic disruption and put them on the right track for 2021.
Trillions of dollars were put into circulation to keep families and businesses afloat, but those provisions may also require quick action, in many cases by the end of 2020. The government's goal has been to get money in the hands of those who really need it, and many of the most generous provisions are tax changes that provide welcome liquidity for businesses and timely relief for individuals.
Here is a list of 10 key tax considerations for year-end tax planning for both individuals and businesses.
FOR INDIVIDUALS:
1. Use above-the-line charitable deduction
Everyone is entitled to a charitable deduction this year. The Tax Cuts and Jobs Act doubled the standard deduction while repealing or limiting many itemized deductions, leaving millions of fewer taxpayers claiming actual itemized deductions. Typically, there is no tax benefit for giving to charity unless you itemize deductions. However, the CARES Act created an above-the-line deduction of up to $300 for cash contributions from taxpayers who don’t itemize. To take advantage of this provision, taxpayers should make sure to donate before the end of the year.
2. Understand the impact of that stimulus check
The CARES Act directed the IRS to issue stimulus checks of up to $1,200 per taxpayer and $500 per qualified child dependent earlier this year. The payments were paid based on 2018 or 2019 return information, but are actually structured as advances of 2020 tax credits. The credits phase out for higher-income taxpayers, so taxpayers want to understand the implications if the check they received based on 2018 or 2019 won’t match the amount of credit they will calculate on the 2020 return. If the 2020 credit calculation is less than they received, there is no clawback. If they received less than the credit calculated for 2020, they can claim it as an additional refund.
3. Supercharge investment with opportunity zones
Opportunity zones are one of the most powerful incentives ever offered by Congress for investing in specific geographic areas. In certain scenarios, not only can an investor potentially defer paying tax on gains invested in an opportunity zone until as late as 2026, but they only recognize 90 percent of the gain if they hold the investment for five years. Additionally, if they hold the investment for 10 years and satisfy the rules, they pay no tax on the appreciation of the opportunity zone investment itself. If they’re worried about capital gains rates going up under a new administration, this may provide an excellent tax-free investment. There are more than 8,000 opportunity zones throughout the United States, and many types of investment, development, and business activities can qualify.
4. Make up a tax shortfall with increased withholding for year-end tax planning
COVID-19 created cash-flow problems for many individuals. Taxpayers should make sure their withholding and estimated taxes align with what they actually expect to pay while they have time to fix a problem. If they find themselves in danger of being penalized for underpaying taxes, they can make up the shortfall through increased withholding on their salary or bonuses. A larger estimated tax payment at the end of the year can still expose them to penalties for underpayments in previous quarters, but withholding is considered to have been paid ratably throughout the year, so increasing it for year-end wages can save them in penalties.
5. Leverage low-interest rates and generous exemptions before they’re gone
The historically low-interest rates and lifetime gift and estate tax exemptions present a powerful estate-planning opportunity. Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS. In addition, the economic fallout of COVID-19 is depressing many asset values. There’s a small window of opportunity to employ estate-planning techniques while interest rates are still low and the lifetime gift exemption is at an all-time high. The current gift and estate tax exemptions are set to expire in a few years, and a new administration in the White House could accelerate that timeline.
FOR BUSINESSES:
6. Accelerate AMT refunds
When the Tax Cuts and Jobs Act repealed the corporate Alternative Minimum Tax, it allowed corporations to claim all their unused AMT credits in the tax years beginning in 2018, 2019, 2020, and 2021. The CARES Act accelerates this timeline, allowing corporations to claim all remaining credits in either 2018 or 2019. This gives companies several different options to file for quick refunds. The fastest method for many companies will be filing a tentative refund claim on Form 1139, but corporations must file by Dec. 31, 2020, to claim an AMT credit this way.
7. Use current losses for quick refunds
The CARES Act resurrected a provision allowing businesses to use current losses against past income for immediate refunds. Net operating losses arising in tax years beginning in 2018, 2019, and 2020 can be carried back five years for refunds against prior taxes. These losses can even offset income at the higher tax rates in place before 2018. Companies should consider opportunities to accelerate deductions into a loss year to benefit from this rate arbitrage and obtain a larger refund.
Accounting method changes are among the most powerful ways to accelerate deductions, but remember any non-automatic changes a company wants to make effective for the 2020 calendar year must be made by the end of the year. C corporations make NOL (Net Operating Loss) refund claims themselves, but passthrough businesses like partnerships and S corporations pass losses onto to owners, who will make claims.
The fastest way to obtain a refund is generally by filing a tentative refund claim, but these must be filed by Dec. 31, 2020, for the 2019 calendar year. If losses will be in 2020, the business should start preparing to file early, because they cannot claim an NOL carryback refund until they file their tax return for the year.
8. Retroactive refund for bonus depreciation
The CARES Act fixed a technical problem with bonus depreciation, a generous provision that allows companies to immediately deduct the full cost of many types of business investments. The legislation expands bonus depreciation to apply to a generous category of qualified improvement property. QIP is commonly thought of as a retail and restaurant issue, but it is much broader and applies to almost any improvement to the interior of a building that is either owned or leased. The fix is retroactive, so businesses can fully deduct qualified improvements dating back to Jan. 1, 2018, which may offer relatively quick refunds. Taxpayers who filed 2018 and 2019 returns before the law changed can choose whether to reflect the additional retroactive deduction entirely in the 2020 year with an accounting method change or amend both the 2018 and 2019 returns to apply bonus depreciation for QIP in each of those years.
9. Claim quick disaster loss refunds
Tax rules allow businesses to claim certain losses attributable to a disaster on a prior-year tax return. This is meant to provide quicker refunds. President Donald Trump’s COVID-19 disaster declaration was unprecedented in scope, designating all 50 states, the District of Columbia, and five territories as disaster areas. This means essentially every U.S. business is in the covered disaster area and may be eligible for refunds from certain types of losses. Under this provision, a business could claim a COVID-19 related disaster loss occurring in 2020 on a 2019 amended return for a quicker refund. The provision may potentially affect losses arising in a variety of circumstances, including the loss of inventory or supplies or the closure of offices, stores, or plants. To qualify, the loss must actually be attributable to or caused by COVID-19 and satisfy several other requirements.
10. Consider the timing of payroll tax deduction
The CARES Act allows employers to defer paying their 6.2 percent share of Social Security taxes for the rest of 2020. Half of the deferred amount is due by Dec. 31, 2021, with the other half due by Dec. 31, 2022. This provides a great liquidity benefit, but taxpayers should consider the impact on deductions before the end of the year. Businesses generally cannot deduct their share of payroll taxes until paid. For most businesses, the value of deferring the actual payment is worth also deferring the deduction, but there may be some benefits for paying early to take the deduction in 2020, such as increasing an NOL for the rate arbitrage benefits discussed above. Some taxpayers using specific methods of accounting may also be able to pay the taxes as late as 8-½ months into 2021 and still claim the deduction for 2020.
BONUS: Re-evaluate the company’s tax function in year-end tax planning
Many tax departments at even the largest and most sophisticated companies still dedicate most of their time to basic number-crunching and repetitive processes. These kinds of inefficiencies make it hard to meet deadlines, present audit and tax risks, and cost businesses money – especially during unprecedented times like the COVID-19 pandemic where teams may be lean and struggling to keep up. Data analytics and automation can help mitigate these problems and enable a business’s tax function to focus more on strategic, value-added solutions – shifting away from a compliance-only role.
If you have any questions about the year-end tax planning tips presented here, you can email me at Larry@TaxProblemSolver.com or phone my office at 855-BEAT IRS (855-232-5752). My Team and I are here to keep you free of any tax problems – and to take advantage of all the beneficial opportunities that exist to benefit you and your situation. Click here for a free consultation!
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