As 2020 comes to a close, start thinking about the changes to tax laws and how they may have affected your organization.
By Julie Murphy, David Henderson and Wesley Allen
Even though the year is not quite over, now is a good time to begin thinking about income taxes. There have been a number of changes to tax laws, many brought about by COVID-19, specifically the Coronavirus Aid, Relief and Economic Security (CARES) Act. Most of these changes affect the 2020 tax year and some have implications for tax years 2018 and 2019 as well.
Items to Discuss
Following is a brief list of some of the items you may want to discuss with your tax advisor before the year ends. The CARES Act and related legislation present several items to consider.
#1: Carryback of Corporate Net Operating Losses
If your business operates as a corporation and generated a net operating loss in 2018, 2019 or 2020, the business may be eligible to carry back losses for each of the five tax years preceding the tax year of the net operating loss. This can result in a refund of previous income taxes paid.
#2: Modification of the Limitation of Excess Business Losses
The CARES Act eases certain limitations for excess losses for a business operating as a partnership, S-corporation or a sole proprietorship. This limitation on losses originally applied to the tax years beginning in 2018. The CARES Act lifted this limitation for 2018, 2019 and 2020 to allow business owners additional deductions.
#3: Increase in the Limitation of Business Interest Expense
Beginning in 2018, taxpayers were subject to business interest expense limitations of 30 percent of adjusted taxable income. The CARES Act increased this limitation for tax years beginning in 2019 and 2020 to 50 percent of adjusted taxable income. Business owners should also consider if this limitation may favorably impact the previously filed 2019 tax returns.
#4: Paycheck Protection Program (PPP) Loan Forgiveness
If your business received a PPP loan and you received an official forgiveness decision from your financial institution, the income may be excluded from gross income.
#5: PPP Loan Expenses Associated with Forgiveness
The IRS has released guidance that qualifying expenses funded as part of the PPP loan will be nondeductible. While taxpayers await further guidance, many have considered the appropriate timing of these nondeductible expenses if official forgiveness occurs in 2021. Will the nondeducibility treatment be applied as the expenses are incurred (2020) or when forgiveness is determined (2021)?
#6: Payroll Tax Deferral—Employer Portion
The CARES Act allows for the deferral of the deposit and payment of the employer’s portion of the Social Security tax through Dec. 31, 2020. Equal payments will be due on Dec. 31, 2021 and 2022. Adequate planning should be performed to plan for the appropriate information reporting of the deferral, as well as for making the future payments.
#7: Payroll Tax Deferral—Employee Portion¹
In August 2020, the IRS released guidance that allows an employer to defer the employee portion of the Social Security tax on wages paid between Sept. 1, 2020 and Dec. 31, 2020. This deferral is required to be repaid between Jan. 1, 2021 to April 30, 2021. It is not mandatory that an employer participate in this program. If your business does participate, careful planning for information reporting and employee communication should be performed.
While the following did not originate through COVID-19 legislation, they offer important reminders for business owners to assist with tax planning.\
#8: New or Used Equipment Purchases
If your business purchased new or used equipment in 2020, it may be eligible for 100 percent bonus depreciation. Bonus depreciation can be claimed in excess of the taxable income for the year (contrasted to a Section 179 deduction that cannot exceed taxable income), which may create a taxable loss for the business. This can favorably impact any net operating loss carrybacks to a prior taxable year.
#9: Estimated Tax Payments
If your business is a corporation and substantially overpaid its 2020 estimated taxes, an opportunity exists to request a quick refund of the overpayment in January 2021 (if you are a calendar year taxpayer).
If the business taxes are paid by an individual (the business is a flow-through or sole proprietorship) and a substantial estimated tax overpayment exists—consider expediting the preparation and filing of your tax returns. A mechanism exists to file an initial tax return, with substantially complete information, as early as January 2021. Once your remaining information is received, a superseding return can be filed with any adjustments before the return due date. A superseding return is not an amended return; rather, a substitute for an originally filed return. While this can be a valuable cash flow tool, caution should be exercised to not request an initial overpayment more than the final tax liability of the superseding return.
#10: Independent Contractor Information Reporting—Form 1099-NEC
For tax year 2020, there are new information reporting requirements for independent contractors, Form 1099-NEC. Jan. 31, (Feb. 1, 2021, for tax year 2020), is the due date for the filing of Form 1099-NEC, for both paper and electronic filing to both the recipient and the IRS. The IRS has eliminated any automatic extensions for filing Form 1099-NEC; therefore, careful planning is needed to meet the new information and due date requirements.
#11: Uncollectible Bad Debts
If your business has bad debts from customers, consider the collectability of these debts before year-end as a bad debt deduction could be warranted.
#12: Idle Equipment Depreciation
If your business had idle equipment that was ready to deploy, the right to claim tax depreciation could continue while idle.
Start a Conversation
Not all of the topics above apply to every business and situation, but your tax advisor can direct you accordingly.
This information is not meant as specific tax advice or recommendations but rather to be used to promote an informed conversation with your tax advisor as you approach year end. | WA
Julie Murphy, MBA is Vice President of Marketing for Commercial Credit Group Inc. (Charlotte, NC). She has nearly 30 years of experience in marketing, currently in financial services where she helps companies with their waste equipment financing challenges. As the daughter of a federally authorized tax preparer (Enrolled Agent), Julie understands the need for companies to be well-informed on tax and other financial matters.
David Henderson, CPA, is Tax Partner with Dixon Hughes Goodman LLP (Charlotte, NC). David has more than 20 years of tax and accounting experience, and he leads the tax practice for DHG Financial Services. David has extensive knowledge in accounting for income taxes, income tax transformation, regulatory capital requirements for financial institutions, state and local tax optimization, affordable housing and renewable energy tax credits, and tax controversy.
Wesley Allen, CPA, CMA, CFE, is Managing Director for Dixon Hughes Goodman LLP. He has more than 16 years of public accounting experience, all of which have been spent with DHG. His experience includes working with financial institutions in the areas of process and control evaluation, external financial reporting to regulatory agencies and investors, financial statement audits, Sarbanes-Oxley compliance, control evaluation, mergers/acquisitions and SEC reporting.
For more information, contact Julie Murphy at (704) 906-3511, e-mail j[email protected] or visit www.commercialcreditgroup.com/industries/waste-equipment-financing.
Pursuant to President Trump’s Executive Order, Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster