- Code Sec. 179 for 2021 will be $1,050,000. Sport Utility under IRC 280F is $26,200.
- Small Business Exception Gross Receipts Test- $26 million
- Estate and Gift Tax exclusion amount $11.7 million. Annual gift tax exclusion remains at $15K per recipient.
- Retirement Plan Contributions:
- 401(k) $19,500
- 401(k) catch-up $6,500
- SEP $58,000
- IRA $6,000
- IRA catch-up $1,000
- Social Security maximum wage base $142,800
- Standard Deduction $25,100 for Married filing Joint
Key Year-End Considerations:
2020 has had its share of challenges and many will be happy to see the year close out. Before we do, there may be opportunities for you to improve your tax situation. This letter includes highlights of tax saving opportunities. Please contact us if you would like to discuss any of this information and application to your tax situation.
Under TCJA, the business taxpayer can continue to get tax benefits including the provisions that:
- the corporate tax rate has been reduced to 21%,
- there is no corporate AMT,
- there are limits on business interest deductions,
- there are very generous expensing and depreciation rules, (more detail)
- non-corporate taxpayers with qualified business income from pass- through entities may be entitled to a special 20% deduction. (more detail)
- Bonus Depreciation continues with high limits. The following are the limits through 2026: (more detail)
100% for property placed in service after Sept. 27, 2017 and before Jan. 1, 2023;
80% for property placed in service during calendar year 2023;
60% for property placed in service during calendar year 2024;
40% for property placed in service during calendar year 2025;
20% for property placed in service during calendar year 2026
CARES ACT CHANGES:
The CARES Act includes several significant business tax provisions intended to improve and liquidity. Among other things, the legislation provides the following opportunities:
- Allowing businesses a five-year carryback of net operating losses (NOLs) earned in 2018, 2019, or 2020. The NOL limit of 80% percent of taxable income is also suspended. Hawaii has not adopted this provision.
- Increasing the net interest deduction limitation, which limited businesses ability to deduct interest paid on their tax returns to 30% of earnings before interest, tax, depreciation and amortization (EBITDA), to 50% of EBITDA for 2020.
- Generally, forgiveness of debt is taxable income. PPP Loan Forgiveness is not taxable. Congress is still reviewing the deductibility of expenses paid with PPP funds.
- Technical amendments regarding qualified improvement property qualifying the property for bonus depreciation. (more detail)
- C-Corporations – Using tentative refund procedures to access cash from new net operation carryback
- Purchasing assets that will take advantage of increased expensing options, as well as Bonus Depreciation and Tangible Repair Regulations
- Entities other than C-corporations-review opportunities to maximize the Qualified Business Income Deduction
- Consider accelerating expenses and deferring income (more detail)
- Dispose of passive activity if it will free up passive losses
- Timing of bonus payment for accrual and cash basis taxpayers
Under TCJA, the individual taxpayer can continue to get tax benefits including the provisions that:
- Lower income tax rates,
- A boosted standard deduction,
- Increased child tax credit,
- Watered-down alternative minimum tax (AMT)
- Solar Credits continue to provide tax savings; however, they are reduced over the next several years.
2020: 26% of the cost of the system.
2021: 22 % of the cost of the system.
2022 and later years: 10 % of the cost of the system for commercial systems. There is no federal credit for residential solar energy systems
CARES ACT CHANGES:
The CARES Act includes several significant business tax provisions intended to improve liquidity. Among other things, the legislation includes the following benefits:
- Creating a $300 partial above-the-line charitable contribution for individuals taking the standard deduction and expands the limit on charitable contributions for itemizers.
- Waiving the 10% early-withdrawal penalty on retirement account distributions for individuals facing virus-related challenges.
- Excluding from an employee’s taxable income certain employer payments of student loans on behalf of employees.
- Defer income (such as bonuses) to stay in lower tax brackets or avoid Net Investment Income Tax or Medicare Tax. (more detail)
- Manage capital gains to stay in lower brackets and harvest losses. (more detail)
- Accelerate deductions to 2020 such as paying your January mortgage in December.
- Consider Traditional IRA to Roth Conversions or potentially leverage the “Back-door Roth” strategy (more detail)
- Balance Standard Deduction years and Itemized Deduction years using a “bunching strategy” (more detail)
- Take your Required Minimum Distributions from your retirement plans or use a Qualified Charitable Distribution. Consider timing if you turned 70 1/2 in 2020 as you may want to defer distribution to 72. (more detail)
- Review Flexible and Health Savings Accounts to claim expenses as well as 2020 contributions.
You may want to reassess your tax planning moves once the November election results are known. If you anticipate tax rates will increase in 2021 you may want to defer expense and accelerate income to 2020. Keep in mind lower income will have lower Adjusted Gross Income thresholds but the expenses may be more beneficial against higher taxed income in 2021. Additionally, if you anticipate that the Estate Tax Exemption will be reduced you may want to consider gifting assets.
- Under pre-CARES Act, except for farming losses and losses of property and casualty insurance companies, an NOL for any tax year was carried forward to each tax year following the tax year of the loss but isn’t carried back to any tax year preceding the tax year of the loss. The CARES Act provides that NOLs arising in a tax year beginning after Dec. 31, 2017 and before Jan. 1, 2021 can be carried back to each of the five tax years preceding the tax year of such loss.
- Under pre-CARES Act, the amount of the NOL deduction was equal to the lesser of (1) the aggregate of the NOL carryovers to such year and NOL carrybacks to such year, or (2) 80% of taxable income computed without regard to the deduction allowable in this section. Thus, NOLs are currently subject to a taxable-income limitation and can’t fully offset income. The CARES Act temporarily removes the taxable income limitation to allow an NOL carryforward to fully offset income. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the 80% limitation in present law). For tax years beginning after 2021, taxpayers will be able to take: (1) a 100% deduction of NOLs arising in tax years prior to 2018, and (2) a deduction limited to 80% of modified taxable income for NOLs arising in tax years after 2017. The provision also includes a technical correction to the 2017 Tax Cuts and Jobs Act (TCJA) relating to the effective date of the NOL carryback repeal. The amendments made by the Act apply to tax years beginning after Dec. 31, 2017, and to tax years beginning on or before Dec. 31, 2017, to which NOLs arising in tax years beginning after Dec. 31, 2017 are carried.
- Businesses may be able to take advantage of the de minimis safe harbor election under Tangible Repair Regulation to expense the costs of lower-cost assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500. Where the UNICAP rules aren’t an issue, consider purchasing such qualifying items before the end of 2020.
Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment-bought used (with some exceptions) or new-if purchased and placed in service this year. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2020.
Qualified improvement property (QIP) is any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date the building was first placed in service. The improvement must be made by the taxpayer. QIP specifically excludes expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building. New for 2020: In 2017, the TCJA modified some rules related to QIP; as a result, QIP was no longer eligible for bonus depreciation. Instead, it had to be depreciated over 39 years. The CARES Act changed that. The CARES Act assigned a 15-year recovery period to QIP. That means that QIP is now eligible for bonus depreciation. The change made by the CARES Act is effective for QIP placed into service after December 31, 2017. Because the change is retroactive, a taxpayer who placed QIP into service in 2018 or 2019 may be able to go back and amend an already filed 2018 or 2019 tax return and claim the bonus depreciation.
Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2019, the expensing limit is $1,040,000, and the investment ceiling limit is $2,590,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. These amounts increase in 2021 to $1,050,000 for expensing with an investment ceiling limit of $2,620,000.
Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2020, if taxable income exceeds $326,600 for a married couple filing jointly, $163,300 for singles and heads of household, and $163,300 for marrieds filing separately, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in-for example, the phase in applies to joint filers with taxable income between $326,600 and $421,400 and to single taxpayers with taxable income between $163,300 and $210,700. Taxpayers may be able to achieve significant savings with respect to this deduction, by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phase-out of the deduction) for 2020. Depending on their business model, taxpayers also may be able increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so don’t make a move in this area without consulting your tax adviser.
C corporations, like individuals, must decide when and how to shift income and deductions between 2020 and 2021. C corporations will, as a general rule, benefit from the deferral of income and the acceleration of deductions in the same way as individuals. However, acceleration of income may be advisable in some cases. For example, corporations (other than certain “large” corporations, see below) can avoid being penalized for underpaying estimated taxes if they pay installments based on 100% of the tax shown on the return for the preceding year. Otherwise, they must pay estimated taxes based on 100% of the current year’s tax. However, the 100%-of-last-year’s-tax safe harbor isn’t available unless the corporation filed a return for the preceding year that showed a liability for tax. A return showing a zero tax liability doesn’t satisfy this requirement. Only a return that shows a positive tax liability for the preceding year makes the safe harbor available. A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2020 (and substantial net income in 2021) may find it worthwhile to accelerate just enough of its 2021 income (or to defer just enough of its 2020 deductions) to create a small amount of net income for 2020. This will permit the corporation to base its 2021 estimated tax installments on the relatively small amount of income shown on its 2020 return, rather than having to pay estimated taxes based on 100% of its much larger 2021 taxable income. Generally speaking, a taxpayer will be treated as a “large” corporation for estimated tax purposes only if it had taxable income of $1 million or more in any one of the three preceding tax years. As a result, a corporation that didn’t reach that threshold in 2018 or 2019 but expects net income of $1 million or more in 2020 and later tax years will have an additional incentive for deferring income into (or accelerating deductions from) 2021. If such a shifting of income or deductions lets the corporation avoid reaching the $1 million threshold in 2020, it will be able to use the 100%-of-last-year’s-tax safe harbor in 2021.
- An accrual basis corporation can take a deduction in its current tax year for a bonus not actually paid to its employee until the following tax year if (1) the employee doesn’t own more than 50% in value of the corporation’s stock, (2) the bonus is properly accrued on its books before the end of the current tax year, and (3) the bonus is actually paid within the first 2½ months of the following tax year (for a calendar year taxpayer, within the first 2½ months of 2021). For cash basis employees (for income that was deferred before it was earned), the bonus won’t be taxable income until the year the employee receives it. The 2020 deduction won’t be allowed, however, if the bonus is paid by a personal service corporation to an employee-owner, or by an S corporation to any employee-shareholder, or by a C corporation to a direct or indirect majority owner.
- Higher–income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.
- The 0.9% additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of a threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he or she would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000.
Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that it, when added to regular taxable income, is not more than the “maximum zero rate amount” (e.g., $80,000 for a married couple). There are opportunities to plan around the 0% rate. For example, if you are a joint filer who realized capital gain of $5,000 on the sale of stock bought in 2009, and other taxable income for 2020 is $70,000-then before year-end, try not to sell assets yielding a capital loss because the first $5,000 of such losses won’t yield a benefit this year. And if you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains sheltered by the 0% rate.
Postpone income until 2021 and accelerate deductions into 2020 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2019 that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2020. For example, that may be the case where a person will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or expects to be in a higher tax bracket next year.
If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA in 2020 if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2020, and possibly reduce tax breaks geared to AGI (or modified AGI). Consider placing retirement assets in a Roth plan to allow you to diversify your IRA distributions in retirement between taxable income from a traditional IRA and generally non-taxable income from the Roth IRA.
- It may be advantageous to try to arrange with your employer to defer, until early 2021, a bonus that may be coming your way. This could cut as well as defer your tax.
- Many taxpayers won’t be able to itemize because of the high basic standard deduction amounts that apply for 2020 ($24,800 for joint filers, $12,400 for singles and for marrieds filing separately, $18,650 for heads of household), and because many itemized deductions have been reduced or abolished. No more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (e.g., tax preparation fees and unreimbursed employee expenses) are not deductible; and personal casualty and theft losses are deductible only if they’re attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met. You can still itemize medical expenses but only to the extent they exceed 10% of your adjusted gross income, state and local taxes up to $10,000, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt, but payments of those items won’t save taxes if they don’t cumulatively exceed the standard deduction amount that applies to your filing status.
- For 2020 taxpayers claiming the standard deduction can claim an above-the-line deduction up to $300 for charitable contributions. This $300 limit applies per return. Thus, married taxpayers filing joint returns can only deduct a total of $300.
Some taxpayers may be able to work around these deduction restrictions by applying a “bunching strategy” to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer will benefit by making two years’ worth of charitable contributions this year, instead of spreading out donations over 2020 and 2021.
- Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2020 deductions even if you don’t pay your credit card bill until after the end of the year.
- If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2020, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2020. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not a good one to the extent it causes your 2020 state and local tax payments to exceed $10,000.
- Home-related expenses are deductible if they are incurred in the individual’s trade or business and the home is exclusively used on a regular basis as the individual s principal place of business i.e., as a place to meet or deal with patients, clients or customers, or, in the case of a separate structure used for trade or business purposes. On the other hand, employees working from home during the COVID-19 pandemic can’t deduct expenses for using their home as an employee because miscellaneous itemized deductions on Schedule A are suspended through 2025. Hawaii has not adopted this limitation so there may be an opportunity to take this on the Hawaii return, depending on the circumstances.
- While the TCJA significantly raised the alternative minimum tax (AMT) amounts, thus subjecting far fewer individual taxpayers to the AMT, the AMT still can affect the year-end planning of high-income taxpayers with large amounts of preference items. If the AMT applies, and the taxpayer’s regular taxable income is relatively small, year-end tax planning may have to be geared more to reducing the AMT than the regular tax.
Taxpayers can skip their required minimum distributions (RMDs) for 2020. In addition, taxpayers who turned 70½ in 2019 and delayed taking their RMD until April 1, 2020, can skip taking that RMD also. In addition, if a taxpayer has already taken a distribution in 2020 that was considered an RMD, the taxpayer has 60 days from the date of the distribution to roll it back into an eligible retirement plan. Further, the CARES Act increased the age for RMD to 72.
- Even though a taxpayer can skip taking an RMD for 2020, the taxpayer might want to consider taking a distribution anyway because tax rates in 2021 might be higher than in 2020 to pay for COVID relief.
- For 2020, eligible individuals are allowed a refundable income tax credit of $1,200 ($2,400 for joint filers) plus $500 for each qualifying child under age 17 (“recovery rebate credit”). The credit is reduced by 5% of the amount by which the taxpayer’s 2020 adjusted gross income exceeds $75,000 ($150,000 for joint filers; $112,500 for heads of household), but not below zero.
The CARES Act established several new temporary funds including following programs to address the COVID 19 outbreak.
- Paycheck Protection Program (PPP) The Paycheck Protection Program is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll. SBA will forgive loans if all employee retention criteria are met, and the funds are used for eligible expenses.
- Economic Injury Disaster Loans (EIDL) In response to the Coronavirus (COVID-19) pandemic, small business owners, including agricultural businesses, and nonprofit organizations in all U.S. states, Washington D.C., and territories can apply for an Economic Injury Disaster Loan. The EIDL program is designed to provide economic relief to businesses that are currently experiencing a temporary loss of revenue due to COVID-19.
Frequently Asked Questions about COVID-19 EIDLE Loans https://www.sba.gov/document/support-faq-covid-19-economic-injury-disaster-loan-eidl
- Economic Injury Disaster Loan grant (EIDL grant) Small businesses and agricultural businesses may apply for the grant, equal to $1,000, per employee of the business up to a maximum of $10,000.
- Federal and Hawaii tax treatment of CARES Act Funds Hawaii Department of Taxation released Tax Information Release No. 2020-06 (Revised) to provide information about tax treatment of various COVID-19 relief programs and payments that the federal government has provided under the CARES Act.