Firm Blog Postings
2020 Tax Savings Opportunities
This has been a particularly turbulent year. This year more than ever it is important to make sure you take advantage of all the yearend tax planning opportunities that are currently available. With many provisions possibly expiring or being time-sensitive, timing is crucial. In response to the Covid 19 Pandemic the Cares Act was passed by Congress and signed into law by President Trump in March of 2020. The Act affords businesses and individuals some tax savings opportunities.
Of course, every taxpayer’s situation is unique, however, below are some highlights that we believe are some of the key provisions and opportunities currently available, broken out into those applying primarily to businesses and individuals.
Net Operating Losses
One of the biggest opportunities created by the CARES Act can potentially be a significant source of liquidity for firms and businesses with current year net operating losses (“NOLs”), or NOLs within the years 2018, 2019, and 2020. Under the Tax Cut and Jobs Act (“TCJA”) of 2017, Congress had done away with NOL carrybacks (2 years of carrybacks allowed under pre-TCJA tax laws). However, for years 2018, 2019, and 2020, the tax law now allows for 5 years of loss carrybacks. This means that returns dating back to 2013 could potentially be amended (with a loss carried back from the 2018 year), thus resulting in significant refunds for those with net operating losses for those years, especially considering the higher tax rates for corporations pre-TCJA. Additionally, for those claiming refunds for the 2019 tax year, they would be able to claim a quick refund, as long as this quick refund application was submitted by the end of calendar year 2020, for much faster processing than the filing and processing of an amended return to claim the same refund.
Covid 19 Pandemic Related Losses
For those businesses with significant COVID 19 pandemic-related losses, either directly or indirectly, they may qualify to claim these losses on their income tax return, as the Trump Administration had declared the pandemic a national disaster/emergency. It is recommended that you check with us or your tax adviser, to determine whether your losses would qualify for this, and if the losses were incurred during the qualifying time period. The CARES Act, and preceding legislation passed by Congress, intended to provide for pandemic-related relief to taxpayers, also includes further provisions for those businesses hit hard by the pandemic, including a refundable employee retention credit, as well as refundable credits for employers that have employees who had to take sick and family leave as a result of either being infected with the virus, or caring for someone who was infected.
Another significant tax law change under the CARES Act, that can be used in conjunction with the liberalized NOL provisions, is the long-awaited technical correction related to the bonus depreciation treatment of Qualified Improvement Property, with a tax life of 15 years. This relates to a TCJA-era oversight in the tax law, related to non-structural improvements to commercial and non-residential real estate. For those that had previously not taken 100% bonus depreciation on such property placed in service after the enactment of the tax reform law (post 9/27/17 in-service dates), and depreciating these improvements over 39 years useful lives, this technical clarification provided for under the CARES Act would now allow for an amendment of a previously filed income tax return for a change in accounting method for these assets, thus potentially resulting in significant tax savings.
Other favorable changes brought about by the CARES Act for businesses include a temporary increase in the cap on business interest that is deductible to 50%, from 30% for year 2019 and 2020; and temporarily doing away with the ability of businesses to take large losses in years 2018, 2019, and 2020. The CARES Act also allows businesses with unused AMT credits in years 2018, 2019, and 2020 to be able to immediately claim these credits as a refund.
Some of the biggest opportunities for individuals in 2020 relate to changes to charitable contribution rules under the CARES Act. The lowest hanging fruit is a $300 above-the-line charitable contribution deduction, available to ALL taxpayers in 2020, regardless of whether they itemize their deductions or not. The CARES Act also includes a one-time increase to the caps on charitable contributions or individuals and businesses. Individuals can now take charitable contributions deductions of up to 100% of their AGI in 2020, or up to 25% of taxable income for corporations, up from 50% and 10%, respectively, under the TCJA rules. Because this change ONLY applies to tax year 2020, taxpayers may want to ‘bunch’ their contributions into the 2020 year, rather than making the same contributions over several years, in order to take advantage of the higher limits during the year.
Retirement Plans Waiver of Early Withdrawal Penalty
The CARES Act creates several retirement-related opportunities for those in need of immediate liquidity. One of these is the waiver of the 10% early withdrawal penalty for distributions from an employer-provided qualified retirement plan, 403(b) plan or an Individual Retirement Account (“IRA”), for a ‘coronavirus-related distribution’ made during calendar year 2020. The distribution can be for an individual, their spouse, or dependent who is diagnosed with the virus, or who ‘experiences adverse financial consequences’ as a result of the pandemic. The general nature of this description creates a broad scope of qualifying use for this distribution.
Retirement Plans Waiver of Early Withdrawal Penalty
Additionally, the CARES Act waives required minimum distributions (“RMDs”) for employer-provided retirement plans, including IRAs. Under the SECURE Act, passed at the end of 2019, two very important provisions now apply to traditional IRAs, including raising the age at which RMDs must be made from 70 ½ to 72 (for taxpayers turning 72 after 2019); and allowing for deductible IRA contributions AFTER age 70 ½. Previously, contributions after age 70 ½ were not allowed. In conjunction with this, one of the most effective dollar-for-dollar opportunities for older taxpayers (over the age of 70 ½) with IRAs is the qualified charitable deduction (QCD). This is a charitable deduction made directly from a taxpayer’s IRA to the trustee of a charitable organization. What makes this such an effective and invaluable opportunity is that not only are the original IRA contributions deductible to the taxpayers in the years they are contributed, but the QCD can then be used in lieu of an RMD for a given tax year, after the taxpayer turns 72, and the distribution is thus not included in the taxpayer’s taxable income for the year. Important to note is that a QCD is limited to $100,000 per taxpayer per year, and in some situations, it may be more advantageous to instead make a Roth IRA contribution, which do not require RMDs.
Two final provisions that may be very useful for individuals include the finalization of qualified opportunity zone investment incentive regulations that were introduced under the TCJA, and the annual gift tax exclusion. Through the investment of funds from capital gain in so-called designated ‘qualified opportunity zones’, taxpayers may be able to defer gains, and even decrease recognition of capital gains by 10% to 100%, depending on how long the investment in the qualified opportunity zone is held. For older taxpayers who are actively looking to avoid the threshold for estate filing purposes in future years, especially with the impending decrease of the threshold in 2026, taking advantage of the annual gift tax exclusion of $15,000 per individual, per year. Contributions on behalf of another individual into a 529 Savings Plan of up to $15,000 can also be considered an excludible annual gift, limited to $15,000 per year. The amount invested in the 529 Savings Plan then grows tax-free, if these funds are eventually used for educational purposes for the beneficiary.
We recognize that these are incredibly trying and distressing times. However, we hope that one or more of the above tax savings opportunities may be applicable to your situation and will be able to provide some much-needed relief. If you would like assistance or would like more information about any of the above opportunities, or for how they may potentially apply to your own unique situation, please feel free to contact Evan Higa of our office.