As you’ve been perusing your favorite finance and tax blogs or news articles, you have probably come across something like:
Disclaimer: This information was correct at the time of publication; however, it is subject to change or new guidance may be issued at any time.
It feels like nothing deserves a disclaimer more than the year 2020. Election years often result in uncertainty for businesses. That is to be expected. Throw in a pandemic, civil unrest, and an economic downturn that has the makings of stretching through the winter, and year-end tax planning for your business may look different than it has in previous years.
Timing of Income and Expenses
The common year-end song and dance of deferring income and accelerating expenses may want to be closely revisited this year. With many businesses experiencing income declines due to COVID-19, it may make sense to take steps to accelerate income into 2020 to use up lower tax brackets or to take advantage of the 20% Qualified Business Income (QBI) deduction. The QBI deduction is set to “sunset” after 2025, but may have a much shorter lifespan depending on the outcome of the election. If 2021 is expected to be more profitable than 2020, and depending on your risk tolerance for potential higher tax rates in the future, deductions pushed to 2021 may be much more valuable as well.
Net Operating Losses as a Cash Infusion
On the flip side of the coin, one provision of the CARES Act allows a taxpayer with a 2020 net operating loss (NOL) to carry that loss back up to 5 years to get a refund of previous taxes paid. For corporate taxpayers this could result in going back to wipe-out income that was taxed at rates as high as 35%. For owners of pass-through businesses, the loss can wipe out other sources of 2020 income and can then be carried back to get a refund of taxes at pre-TCJA rates. While you won’t get a check from Uncle Sam overnight a NOL refund could be a welcome cash infusion for any business or business owner.
If your situation is such that a carryback may be beneficial, it may make sense to take steps to push for a larger loss in 2020 and thus a greater carryback refund. This could be done by:
- Sticking to the normal year-end plan of deferring income and accelerating expenses; or
- Purchasing equipment, vehicles or other qualifying property that can be fully deducted under the bonus depreciation rules.
Losses can be limited by basis or other loss limitation rules, so it is important to work with your tax advisor to maximize any potential NOL benefits.
Paycheck Protection Program Loans and Other CARES Act Assistance
Late Spring and most of Summer saw businesses scrambling to make sure they received their chunk of CARES Act relief being offered to small businesses. Now that the dust has settled, it is important to revisit the impact this assistance may have on year-end tax planning. Specifically:
Paycheck Protection Program (PPP) Loans
Most businesses that have taken a PPP loan have reached or are close to reaching the end of their “covered period”. After the covered period has ended, borrowers have 10 months to apply for forgiveness. The bank then has 60 days to review and approve the request and the Small Business Administration (SBA) has up to 90 days to approve the request from the lender. So, for practical purposes, unless already submitted, most loans will not be forgiven until 2021. What does that mean for 2020 tax planning?
When the CARES Act was passed, the law made forgiveness of PPP loans non-taxable. Subsequently, the IRS issued Notice 2020-32 which clearly states that any expenses paid with forgiven PPP loan funds would not be deductible. Essentially this makes it the same as treating the forgiven loan as taxable income and deducting the expenses.
If the loan isn’t forgiven until 2021 does that mean the expenses are deductible in 2020 or should they be treated as non-deductible expenses assuming the loan will be forgiven? The answer right now is unclear. There is hope that Congress will pass a bill that would allow the expenses paid with PPP funds to be fully deductible as that was the intent when the CARES Act was passed. However, it is very possible we won’t get any additional guidance or legislation before year-end. Because of this, it is important to make your tax advisor aware of the amount of your PPP loan, how you have it reflected on your financial statements, and where you are at in the forgiveness process.
Economic Injury Disaster Loan (EIDL) Grant
The EIDL emergency grant of up to $10,000 does not need to be paid back and will be considered taxable income in 2020.
Some local governments have used a portion of the CARES Act funding that they received to pass along to local businesses by the way of grants. Like the EIDL grant, these will be considered taxable income in 2020.
SBA Loan Payment Coverage
The CARES Act included $17 billion to cover non-COVID related SBA loan payments for six months. If you had an existing SBA 7(a) or 504 loan you probably noticed that your automatic ACH payments stopped beginning with the first payment due after March 27, 2020. All qualifying loans were automatically enrolled in the program; you didn’t need to opt in or sign up for anything. Current IRS rules suggest that the SBA’s loan payments should be considered taxable income.
Much like the PPP loan, it is important to make sure your tax advisor is aware of all grants or loan payment assistance that you received.
One thing we have learned this year is to expect the unexpected. Boeckermann Grafstrom & Mayer will continue to monitor the results of the election as well as the progress of any additional stimulus packages that move through Congress. If you have any questions or would like to learn more, contact Anthony Laxen at firstname.lastname@example.org.
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