As 2020 draws to a close, businesses and individuals should consider what tax planning strategies make the most sense for them. Here are some key tax planning considerations to keep in mind as we approach the end of the year.
- Paycheck Protection Program (PPP) Forgiven Expenses – Based on current guidance from the IRS, we know that expenses associated with PPP loan forgiveness are not deductible. On November 18, 2020, additional guidance was issued confirming that expenses are non-deductible in 2020 if you meet the criteria for forgiveness under the CARES Act and intend to apply for forgiveness. The new guidance makes it clear it does not matter if you have not received a determination of forgiveness before the end of the year, therefore the impact should be considered with 2020 year-end planning. If you are taking advantage of the Research & Experimentation (R&E) tax credit, there are other issues to consider as well. It was not the intent of Congress for the forgiven loan to have an impact on taxable income; however, a technical correction is not yet in the works and businesses need to plan accordingly.
- Qualified Improvement Property – The much-anticipated technical correction was made through the Coronavirus Aid, Relief, and Economic Security (CARES) Act for Qualified Improvement Property. Under the fix, depreciable property that was placed in service after 2017 and meets the definition of qualified improvement property is eligible for bonus depreciation. In some cases, significant tax dollars can be recovered from this fix by amending a prior year’s return or having a cost segregation study performed.
- Charitable Donations – Corporations can now deduct up to 25% of taxable income instead of only 10% under the pre-CARES Act rules.
- Net Operating Losses (NOLs) – NOLs that were generated in a taxable year beginning after 12/31/17 and before 1/1/21 may be carried back which is a change from the Tax Cuts and Jobs Act (TCJA) which only allowed NOL carryforward. NOL carryback claims are typically filed on Form 1139 for corporations; however, the 2018 carryback claim was due June 30, 2020, and the 2019 carryback claim using Form 1139 is due December 31, 2020. Outside of using Form 1139, amended returns can be filed within the statute of limitations. Keep in mind that carrybacks can be favorable for offsetting income that was paid during a time when tax rates were higher (pre-2018).
- Charitable Donations – The CARES Act included a provision whereby non-itemizers can take a deduction for charitable donations made during 2020. The maximum deduction is $300 and must be a cash donation made to a qualified organization. Additionally, the CARES Act allows for itemizing taxpayers to elect to deduct up to 100% of adjusted gross income (AGI) via charitable donations paid in cash to qualified organizations.
- NOL Carrybacks – Similar to corporations, the CARES Act allows for individuals who incurred a net operating loss in 2018, 2019, or 2020 to carryback their loss. Additionally, unused NOLs are carried forward to a future year if the carryback option is waived.
Businesses and individuals should keep in mind presumed President-Elect Biden’s proposed tax agenda when making decisions about the 2020 year-end. As always, Clayton & McKervey is available for help when considering the best tax planning approach. For additional information, call us at 248.208.8860 or click here to contact us. We look forward to speaking with you soon.