With the end of 2020 approaching, it is time to prepare for what promises to be an unprecedented tax season. Here are some of the key issues that business owners, financial officers, and tax executives should consider now.
Note: This is by no means a complete list, and the tax consequences of some pandemic relief programs might change.
COVID-Related Tax Provisions
Both the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Families First Coronavirus Relief Act (FFCRA) contain provisions with significant tax consequences.
For example, companies must evaluate the tax treatment of loans that either were forgiven or will be forgiven under the CARES Act’s Paycheck Protection Program (PPP), as well as the non-deductibility of expenses paid with PPP proceeds. Companies that deferred paying a portion of their payroll taxes until 2021 or 2022, as the CARES Act allowed, must also consider the impact that will have on 2020 deductions.
Businesses also should take advantage of various available tax credits, including the Employee Retention Credit and credits to offset costs from the CARES Act’s expanded sick pay and paid family leave benefits.
The CARES Act amended many provisions of the 2017 Tax Cuts and Jobs Act (TCJA). It increased the Section 163(j) ceiling on business interest deductions, restored net operating loss (NOL) carrybacks, and accelerated the refund of corporate alternative minimum tax (AMT) credits. It also liberalized the TCJA’s Section 461(l) excess business loss limitations, which could have a significant impact on pass-through business owners.
Partnership Capital Reporting Requirements
Historically, partnerships could use any reasonable method (such as generally accepted accounting principles) to report partners’ shares of partnership capital. This started to change in 2018 and, after a delay in 2019, the IRS has released rules that require partnerships to use only the “tax-basis method” for reporting partners’ capital account information.
Except for small partnerships (generally those with annual receipts less than $250,000 and total assets less than $1million), partnerships must disclose “tax-basis” capital information for all partners on the partnership’s 2020 tax return. The transition may require considerable data gathering and complex calculations, so partnerships should plan to work on this new compliance requirement soon.
Recurring Year-End Tax Topics
Each year, the IRS adjusts the taxable income thresholds for the Section 199A deduction, also known as the qualified business income (QBI) deduction, which allows sole proprietors, partners, and S corporation shareholders to deduct up to 20 percent of the pass-through income reported on their individual tax returns.
For 2020, the phase-out thresholds are $326,600 for couples filing jointly and $163,300 for all other taxpayers. The IRS also issued final regulations in 2020 for reporting qualified real estate investment trust dividends under Section 199A.
Another recurring year-end concern involves capital asset depreciation. With the TCJA’s expansion of bonus depreciation and recent changes to Section 179 of the tax code, companies need to carefully evaluate which of these methods will be most beneficial for assets acquired in 2020.
A year-end review should also examine proper accounting for business entertainment expenses and meals to make sure that maximum deductions are claimed. Another area to address is the reporting of taxable fringe benefits for employees and company owners.
2020 Tax Developments
One area of concern in 2020 involves expenses related to employees working from home. Company policies regarding reimbursement for telephones, internet service, and computers can have unexpected tax consequences for both the company and its employees. Working remotely can also create income tax, sales tax, and payroll withholding issues that companies need to address.
Another 2020 development is the new Form 1099-NEC, which is used to report nonemployee compensation, such as payments to independent contractors, freelancers, and other service providers. This new form also triggered rule and deadline changes that affect other 1099 reporting forms.
Retirement and Tax Planning Issues
In addition to corporate tax changes, 2020 saw changes that affect individual taxpayers. For example, the CARES Act eliminated the required minimum distributions (RMDs) for IRAs and other qualified retirement plans for 2020, allowed some penalty-free early withdrawals under certain circumstances, and changed the rules on charitable contribution deductions.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in late 2019, introduced even more changes, permanently raising the ages at which taxpayers must start taking RMDs, eliminating the age limit on traditional IRA contributions, and, generally, requiring beneficiaries of inherited IRAs to liquidate their accounts within 10 years. These changes could have significant impacts on taxpayers’ retirement and estate planning.
Please contact us to discuss any year-end questions or planning opportunities.