Corona Virus Business Resources
In these unprecedented times, staying informed on daily changes while still trying to operate a business is overwhelming. Visit the Corona Virus Resources page for regular updates including Families First Coronavirus Response Act Q&A from the DOL, SBA loan highlights, and more.
Additional Tax Saving Ideas (12/2020)
• Enacted on March 27, 2020, the CARES Act established two retroactive provisions that can provide immediate cash flow relief to business owners. The first is the temporary removal of the limitation on net operating losses (NOLs). Under the Tax Reform of 2017 these losses had been limited to 80% of current year taxable income with the balance being carried forward, however, Taxpayers can now utilize their losses to completely offset taxable income. In addition, Taxpayers can now carryback losses originating in 2018 through 2020 back five years. This means you could offset 2015 income with current losses and because tax rates were higher prior to the 2017 Tax Cuts and Jobs Act, the carryback benefit is likely more advantageous than carrying the loss forward. The CARES Act also corrected a drafting error related to Qualified Improvement Property (QIP) made by a taxpayer to an interior portion of an existing building that is nonresidential real property. Under the Tax Reform of 2017 the statutory language did not explicitly provide for 100% first year bonus depreciation for such improvements, but now they are included in the definition of 15-year property, so taxpayers that made such qualified improvements in the past two years can now claim an immediate tax refund for the amount of bonus depreciation they missed.
• In terms of payroll tax relief, the major highlights are the Employee Retention Credit and the Paid Leave Credit. The Employee Retention Credit is a refundable tax credit equal to 50% of wages paid by an eligible employer whose business has been financially impacted by COVID-19, up to $10,000. The Paid Leave Credit reimburses employers for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19. Please note that various stipulations exist related to the Employee Retention Credit, most notably that the credit is not available if Payroll Protection Program (“PPP”) funding was received.
• If you are self-employed you might separately qualify for a payroll tax deferral. This deferral would allow payroll taxes to be paid over the next two years. Consult your payroll provider for maximizing these credits/deferrals in 2020.
• Another important reminder for the self-employed is the home office expenses deduction. Unfortunately, employees, even those required to work from home during the pandemic, cannot deduct home office expenses. However, if you are self-employed and your home office is your principal place of business, used regularly and exclusively for conducting business, you could deduct a variety of costs related to that space, such as utilities or repair/maintenance costs.
• If you have a traditional IRA, a partial or full conversion to a Roth IRA can allow you to turn tax-deferred future growth into tax-free growth. It also can provide estate planning advantages, by allowing your entire balance to grow tax-free for the benefit of your heirs. It is important to note that the converted amount is taxable in the year of conversion so this strategy might not be ideal for those individuals looking to minimize cash outflows in light of the current economic situation. However, the possibility of vast legislative changes under a new administration that will likely increase tax rates from the historically low levels currently in effect means that such a conversion would be more beneficial sooner rather than later. To the extent that your income from other sources is down, driving you into a lower tax bracket and you have the ability to pay the associated taxes, this strategy could be a timely opportunity to take advantage of future tax-free growth.
• The CARES Act also suspended the Required Minimum Distributions (RMDs) for 2020 therefor those who didn’t need the cash could opt to defer, if you already budgeted to pay tax on your RMD, rolling that distribution to a Roth IRA could be an option. As explained above once in the Roth IRA, future growth will be tax free.
• Building on the previous retirement planning discussion, the SECURE Act enacted December 20, 2019 removed the age limitation for IRA deductible contributions such that, those over the age of 70½ with earned income may want to consider putting additional funds away for retirement with the added benefit of reducing their 2020 tax.
Although we have listed several tax saving opportunities due to new legislation, overall tax planning needs to take into consideration many different opportunities that are available, while coordinating tax savings strategies to maximize the savings between both the current and upcoming year. As always, we are here to answer any tax planning questions you may have.