Amid the chaos of the COVID-19 pandemic, the resulting economic downturn and civil unrest, businesses are on their yearly search for ways to minimize their tax bills while realizing that some of the typical approaches aren’t necessarily well-suited for this year. Understanding the opportunities that have arisen thanks to Federal tax relief legislation is important, and adopting the right tax strategy will help businesses navigate this time of historic disruption and put them on the right track as a new year begins.
Key tax considerations for year-end planning for businesses:
Accelerate AMT Refunds. When the Tax Cuts and Jobs Act (TCJA) repealed the corporate alternative minimum tax (AMT), it allowed corporations to claim all their unused AMT credits in the tax years beginning in 2018 and through 2021. The Coronavirus Aid, Relief, and Economic Security (CARES) Act accelerates this timeline, allowing corporations to claim all remaining credits in either 2018 or 2019, opening the door to immediate 100% refunds for excess credits. If the corporation wishes to claim the entire credit in 2018 or 2019, it can either file an amended return for 2018 or 2019, or file for a tentative refund on Form 1139, “Corporation Application for Tentative Refund.”
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 (NOLs) arising in tax years 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. The highest tax bracket for married filing jointly (MFJ) individuals for the years ended December 31, 2013 through December 31, 2017 was 39.6%. However, for the tax year ended December 31, 2018 through December 31, 2020, the maximum tax bracket for MFJ individuals was decreased under the Tax Cuts and Jobs Act (TCJA) to 37%. As a result, losses incurred in 2018 through 2020, where the maximum rate was 37% can be carried back to tax years 2013 through 2017 to potentially offset income that was taxed at 39.6%, thus providing an advantage to carrying back the losses versus carrying them forward, where utilization may be limited.
Retroactive Refund for Bonus Depreciation. The CARES Act fixed a drafting error in the TCJA that left qualified improvement property (QIP), generally interior improvements to nonresidential real property, ineligible for bonus deprecation. The fix is retroactive, so you can fully deduct qualified improvements dating back to January 1, 2018, which may offer relatively quick refunds. Under Rev. Proc. 2020-25, the Internal Revenue Service issued procedural guidance on three ways taxpayers can take advantage of the QIP correction on their tax returns. Certain taxpayers can elect to take 100% bonus depreciation on the qualified improvement property by filing an amended return, an Administrative Adjustment Request (AAR) under Section 6227, or a Form 3115, Application for Change in Accounting Method, to change their depreciation of QIP placed in service after December 31, 2017, in the taxpayers 2018, 2019, or 2020 tax year. Based on your specific facts and circumstances, each option should be reviewed to determine the best course of action to take.
Payroll Tax Deduction. The CARES Act allows employers to defer paying their 6.2% share of Social Security taxes for the rest of 2020. Half of the deferred amount is due by December 31, 2021, with the other half due by December 31, 2022. This essentially provides an interest-free loan and a temporary liquidity benefit, but taxpayers should consider the impact on deductions before the end-of-the-year.
IRC Section 139 - Disaster Relief Payments. Section 139 of the Code allows employers to make certain qualified disaster relief payments to employees that are tax advantageous. In response to the COVID-19 pandemic, which was declared as a national emergency, Section 139 disaster relief payments have escalated in relevancy given the impact of COVID-19 on the workforce. Additionally, the Families First Coronavirus Response Act (FFCRA) expanded the application of these tax-free payments, giving employers the ability to reimburse or pay employees for “reasonable and necessary personal, family, living, or funeral expenses” incurred as a result of COVID-19. These payments are exempt from almost all employer and employee Federal, state, and local taxes. However, they remain deductible business expenses for an employer. Businesses are leveraging Section 139 to assist employees with medical expenses not compensated for by insurance, the cost of over-the-counter medications, and the costs associated with enabling employees to work-from-home such as office supplies and increased cell phone costs, and receiving a tax deduction for doing so.
Accelerating Income and Deferring Deductions. This may sound like the opposite of “tax planning” compared to traditional deferral strategies. Why would you want to accelerate income into 2020 and pay tax on that income now instead of deferring it to future years? If you haven’t heard, we are in the middle of an election year, and depending on the outcome of that election, there may be significant tax ramifications. Under Vice-President Joe Biden’s proposed tax plan, taxes could be increased beginning in 2021. As a result, it could be beneficial for taxpayers to accelerate earnings into the 2020 tax year to “lock in” the lower rates currently available under the TCJA. Taxpayers could also benefit by electing out of or deferring certain deductions in 2020 and claiming them in future tax years where rates may be higher.
These tax-planning considerations are just the start. There are many other important opportunities, and lawmakers are still considering further stimulus and economic recovery legislation. It is possible some of the benefits above are enhanced and new benefits may be offered.
Mickel Pompeii, CPA, CDA, is a tax partner with Dannible & McKee, LLP, a Syracuse, New York based public accounting firm. The firm has specialized in provided tax, audit and accounting services since its inception in 1978. For more information on this topic, you may contact Mickel at mpompeii@dmcpas.com or visit us online at www.dmcpas.com.
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