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2020 Business Tax Planning
Category: Helpful Articles
What’s happening with deductions in 2020?
The standard deduction has once again been increased for inflation. The 2020 amounts for separate filers is $12,400 and for joint filers is $24,800. Itemized deductions are more beneficial if taxpayers ‘bunch’ deductions into one year. The itemized deductions that may be able to be shifted from year-to-year are real estate taxes, state income tax estimates, and charitable contributions. An example of this would be paying your 2020 and 2021 real estate taxes in the same year. This bunching strategy needs to be discussed with your tax advisor to be most beneficial. Also need to remember there is a $10,000 cap on the amount of property and income taxes you deduct.
If you don’t itemize deductions, normally you can’t deduct charitable donations. But, the CARES Act allows taxpayers who claim the standard deduction to deduct up to $300 of cash donations to qualified charities in 2020.
Here’s a Tip: If you know you’re not going to have more than the standard deduction, then don’t worry about gathering the itemized deduction documentation and turning them into your CPA.
As a reminder, Itemized deductions consist of the following: medical expenses, sales and real estate taxes, mortgage interest, charitable contributions. Talk to your CPA if you have any questions on what may qualify.
-Single Standard Deduction $12,400
-Married Filing Jointly Deduction $24,800
Tax expert, Abby Norville, CPA, gives a timely overview on year-end tax planning for deductions. Watch the video to learn more on key information for itemized deductions.
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Business costs and tax deductions
Generally, a taxpayer can deduct costs incurred in the course of operating a business if the costs can be proven. This includes costs for “listed property” (property used for transportation, entertainment or recreation). To prove business use of listed property, taxpayers must keep adequate records of total use and business use, plus dates and the business purpose. One married couple purchased a yacht and an RV and contributed them to a marina they owned. They deducted depreciation for both on their tax return, but the IRS denied the deduction. The 10th Circuit Court of Appeals agreed, noting that records didn’t prove the vehicles were used in the marina business. Discuss business costs and tax deductions with one of our experts.
Cash flow is a top concern for most businesses today. Cash flow forecasts can help you predict potential shortfalls and proactively address working capital gaps. They can also help avoid late payments, identify late-paying customers and find alternative sources of funding when cash is tight. To keep your company’s cash flow positive, consider applying these four best practices.
- Identify peak needs. Many businesses are cyclical, and their cash flow needs may vary by month or season. Trouble can arise when an annual budget doesn’t reflect, for example, three months of peak production in the summer to fill holiday orders followed by a return to normal production in the fall. For seasonal operations — such as homebuilders, farms, landscaping companies, recreational facilities and many nonprofits — using a one-size-fits-all approach can throw budgets off, sometimes dramatically. It’s critical to identify peak sales and production times, forecast your cash flow needs and plan accordingly.
- Account for everything. Effective cash flow management requires anticipating and capturing every expense and incoming payment, as well as — to the greatest extent possible — the exact timing of each payable and receivable. But pinpointing exact costs and expenditures for every day of the week can be challenging. Companies can face an array of additional costs, overruns and payment delays. Although inventorying all possible expenses can be a tedious and time-consuming exercise, it can help avoid problems down the road.
- Seek sources of contingency funding. As your business expands or contracts, a dedicated line of credit with a bank can help meet your cash flow needs, including any periodic cash shortages. Interest rates on these credit lines can be comparatively high compared to other types of loans. So, lines of credit typically are used to cover only short-term operational costs, such as payroll and supplies. They also may require significant collateral and personal guarantees from the company’s owners.
- Identify potential obstacles. For most companies, the biggest cash flow obstacle is slow collections from customers. Your business should invoice customers in a timely manner and offer easy, convenient ways for customers to pay (such as online bill pay). For new customers, it’s important to perform a thorough credit check to avoid delayed payments and write-offs. Another common obstacle is poor resource management. Redundant machinery, misguided investments and oversize offices are just a few examples of poorly managed expenses and overhead that can negatively affect cash flow.
Adjusting as you grow and adapt your company’s cash flow needs today likely aren’t what they were three years ago — or even six months ago. And they’ll probably change as you continue to adjust to the new normal. That’s why it’s important to make cash flow forecasting an integral part of your overall business planning. We can help. Contact us at www.ata.net.
If you invest in mutual funds, be aware of some potential pitfalls involved in buying and selling shares.
Surprise sales
You may already have made taxable “sales” of part of your mutual fund investment without knowing it. One way this can happen is if your mutual fund allows you to write checks against your fund investment. Every time you write a check against your mutual fund account, you’ve made a partial sale of your interest in the fund. Thus, except for funds such as money market funds, for which share value remains constant, you may have taxable gain (or a deductible loss) when you write a check. And each such sale is a separate transaction that must be reported on your tax return. Here’s another way you may unexpectedly make a taxable sale. If your mutual fund sponsor allows you to make changes in the way your money is invested — for instance, lets you switch from one fund to another fund — making that switch is treated as a taxable sale of your shares in the first fund.
Recordkeeping carefully
Save all the statements that the fund sends you — not only official tax statements, such as Forms 1099-DIV, but the confirmations the fund sends you when you buy or sell shares or when dividends are reinvested in new shares. Unless you keep these records, it may be difficult to prove how much you paid for the shares, and thus, you won’t be able to establish the amount of gain that’s subject to tax (or the amount of loss you can deduct) when you sell. You also need to keep these records to prove how long you’ve held your shares if you want to take advantage of favorable long-term capital gain tax rates. (If you get a year-end statement that lists all your transactions for the year, you can just keep that and discard quarterly or other interim statements. But save anything that specifically says it contains tax information.) Recordkeeping is simplified by rules that require funds to report the customer’s basis in shares sold and whether any gain or loss is short-term or long-term. This is mandatory for mutual fund shares acquired after 2011, and some funds will provide this to shareholders for shares they acquired earlier, if the fund has the information.
Timing purchases and sales
If you’re planning to invest in a mutual fund, there are some important tax consequences to take into account in timing the investment. For instance, an investment shortly before payment of a dividend is something you should generally try to avoid. Your receipt of the dividend (even if reinvested in additional shares) will be treated as income and increase your tax liability. If you’re planning a sale of any of your mutual fund shares near year-end, you should weigh the tax and the non-tax consequences in the current year versus a sale in the next year. Identify shares you sell If you sell fewer than all of the shares that you hold in the same mutual fund, there are complicated rules for identifying which shares you’ve sold. The proper application of these rules can reduce the amount of your taxable gain or qualify the gain for favorable long-term capital gain treatment.
Contact us if you’d like to find out more about tax planning for buying and selling mutual fund shares. Visit our locations page to find your ATA office. © 2020
Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2020. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
- Thursday, October 15 If a calendar-year C corporation that filed an automatic six-month extension: File a 2019 income tax return (Form 1120) and pay any tax, interest and penalties due. Make contributions for 2019 to certain employer-sponsored retirement plans.
- Monday, November 2 Report income tax withholding and FICA taxes for third quarter 2020 (Form 941) and pay any tax due. (See exception below under “November 10.”)
- Tuesday, November 10 Report income tax withholding and FICA taxes for third quarter 2020 (Form 941), if you deposited on time (and in full) all of the associated taxes due.
- Tuesday, December 15 If a calendar-year C corporation, pay the fourth installment of 2020 estimated income taxes.
- Thursday, December 31 Establish a retirement plan for 2020 (generally other than a SIMPLE, a Safe-Harbor 401(k) or a SEP).
© 2020
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What’s Next for a Stimulus Bill?
The Senate Republicans’ slimmed-down stimulus bill recently failed to materialize after receiving less than the 60 votes needed to move forward. The “skinny” stimulus bill, with a price tag of only $650 billion, was intended to be a way to quickly inject stimulus into the economy and bypass both the multi-trillion-dollar Republican HEALS Act and the Democratic HEROES Act.
The current stimulus limbo leaves millions of Americans in a position of uncertainty. Four main areas that the Senate bill intended to address but are now up in the air include a second round of stimulus checks and the impact on struggling tenants and homeowners, as well as the long-term unemployed.
Next Round of Stimulus Checks
The first stimulus bill, the CARES Act, sent more than $300 billion in stimulus checks to Americans back in March to help mitigate the effects of COVID-19 slowdowns. While this helped millions, many people’s jobs or businesses remain impaired due to the economic impact of the pandemic, and they are hoping for a second stimulus check to help them get by.
With the failure of the Senate bill and the stalemate in the House, the chances of a second round of checks continues to diminish. On the bright side, the U.S. Treasury noted it is ready to print and mail the checks as soon as something is authorized.
Troubled Tenants and Homeowners
The economic fallout from the pandemic placed many tenants and homeowners in the position of being evicted or foreclosed. The CARES Act from March placed a temporary moratorium on evictions and foreclosures, sparing millions. Following this measure, President Trump issued an executive order in August granting the CDC authority to cease evictions as a measure to prevent the spread of COVID-19. The CDC took this order and announced a stop to all evictions until the end of 2020.
For homeowners with federally backed mortgages, the CARES Act moratoriums on single-family foreclosures were also extended until the end of 2020. Moreover, many states passed laws protecting those without federally backed loans from foreclosure.
For both renters and homeowners, these protections will disappear once we enter 2021 unless the government steps in with new legislation or regulations. Keep in mind that for both renters and mortgage holders, payments are being deferred and not canceled – so ultimately, they will still need to make the payments.
Long-Term Unemployment
Millions remain unemployed due to the pandemic; without federal help, their unemployment benefits will expire soon. The CARES Act gave an additional 13 weeks of benefits on top of the initial 26 weeks of unemployment insurance benefits; however, for those impacted on the front-end of the pandemic, these extended benefits will expire at the end of November.
The Senate bill included $300 per week of benefits through the last week of 2020; however, with this failing and without additional aid to state funds, the long-term unemployed won’t have anything to rely on if Congress does nothing.
Conclusion
Democrats responded with a smaller version of their original second-round stimulus bill, coming in a price tag of $2.2 trillion, down from the original $3.4 trillion. This is likely too high a price tag still to garner Republican support. If nothing happens before the mid-October recess, then we will all be waiting until after the Nov. 3 election.
When it comes to tax planning and your investments, it can be difficult to know where to start. First, tax treatment of investments varies based on a number of factors, such as type of investment, type of income it produces, how long you’ve held it and whether any special limitations or breaks apply. And you need to understand the potential tax consequences of buying, holding and selling a particular investment. Higher-income taxpayers also need to know when higher capital gains tax rates and the NIIT kick in. The Tax Cuts and Jobs Act (TCJA) didn’t repeal the NIIT or change the long-term capital gain rates, but its changes to ordinary income tax rates and tax brackets are having an impact on the tax paid on investments.
Yet, it’s unwise to make investment decisions based solely on tax consequences — you should consider your investment goals, time horizon, risk tolerance, factors related to the investment itself, fees and charges that apply to buying and selling securities, and your need for cash as well.
Finally, your portfolio and your resulting tax picture can change quickly because of market volatility. Vigilance is necessary to achieve both your tax and investment goals.
Being tax-smart with losses
Losses aren’t truly losses until they’re realized — that is, generally until you sell the investment for less than what you paid for it. So while it’s distressing to see an account statement that shows a large loss, the loss won’t affect your current tax situation as long as you still own the investment.
Realized capital losses are netted against realized capital gains to determine capital gains tax liability. If net losses exceed net gains, you can deduct only $3,000 ($1,500 for married taxpayers filing separately) of losses per year against ordinary income (such as wages, self-employment and business income, interest, dividends, and taxable retirement plan distributions). But you can carry forward excess losses until death. In the current market, you may not have enough gains to absorb losses, which could leave you with losses in excess of the annual ordinary-income deduction limit. So think twice before selling an investment at a loss. After all, if you hold on to the investment, it may recover the lost value. In fact, a buy-and-hold strategy works well for many long-term investors because it can minimize the effects of market volatility.
Of course, an investment might continue to lose value. That’s one reason why tax considerations shouldn’t be the primary driver of investment decisions. If you’re ready to divest yourself of a poorly performing stock because, for example, you don’t think its performance will improve or your investment objective or risk tolerance has changed, don’t hesitate solely for tax reasons.
Plus, building up losses for future use could be beneficial. This may be especially true if you have a large investment portfolio, real estate holdings or a closely held business that might generate substantial future gains.
Finally, remember that capital gains distributions from mutual funds can also absorb capital losses.
You’re probably aware of the 100% bonus depreciation tax break that’s available for a wide variety of qualifying property. There are some important points to be aware of when it comes to this powerful tax-saving tool. For example, bonus depreciation is available for new and most used property. And it’s scheduled to phase out. Under current law, 100% bonus depreciation will generally be phased out in steps. An 80% rate will apply to property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, and a 0% rate will apply in 2027 and later years. Asset depreciation can be a complex area of tax law. Contact us with questions about your situation.
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Guidance on Payroll Tax Deferral
Background
On August 8, 2020 the President of the United States issued a Presidential Memorandum directing the Secretary of the Treasury to use his authority to defer the withholding, deposit and payment of certain payroll obligations. Accordingly, the Secretary of the Treasury determined that employers that are required to withhold and pay the employee share of social security tax (FICA – 6.2%) or the railroad retirement tax equivalent could defer the withholding of that tax on payroll payments from September 1, 2020 to December 31, 2020 and collect from the employee (withhold) during the period January 1, 2021 to April 30, 2021.
Late on Friday, the IRS issued minimal guidance on the payroll tax deferral regarding the employee portion of social security taxes.
Implementing the payroll tax deferral
Under the guidance issued, this program is optional to the employer and is not an employee elected deferral. Employers can defer the withholding, deposit, and payment of certain payroll taxes on wages paid from Sept. 1 through Dec. 31, 2020. The deferral applies to the employee portion of the old-age, survivors, and disability insurance (OASDI) tax under Sec. 3101(a) and Railroad Retirement Act Tier 1 tax under Sec. 3201 (FICA – 6.2%). The due date for withholding and payment of these taxes is postponed until the period beginning Jan. 1, 2021, and ending April 30, 2021.
The deferral applies to any employee whose pretax wages or compensation during any biweekly pay period generally is less than $4,000 (approximately $104,000 annually). The notice defines applicable wages, for these purposes, as wages as defined in [Sec.] 3121(a) or compensation as defined in [Sec.] 3231(e) paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020, but only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods.
The amounts to be deferred are ONLY the employee portion of the FICA / Railroad Retirement Act. THERE IS NO DEFERRAL OF THE PAYMENT OF THE EMPLOYER’S PORTION OF TAXES OR THE EMPLOYEE’S WITHHELD FEDERAL INCOME TAX AND MEDICARE TAX.
Under the notice, the determination of applicable wages is to be made on a pay-period-by-pay-period basis — meaning that if the amount of compensation payable to an employee for a particular pay period is less than the threshold amount ($4,000 for biweekly pay periods), then the payroll tax deferral applies to that compensation, irrespective of the amount paid to that employee in other pay periods.
The notice requires affected employers to withhold and pay the deferred taxes from wages and compensation paid during the period between Jan. 1, 2021, and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on unpaid taxes starting May 1, 2021. The notice says, that, if it is necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee” but does not provide details on that requirement. This would ultimately appear to place the liability on the employer.
Optional to the employer
Employers, if you defer your payroll taxes from your employees and your employee leaves for any reason and is not employed during the period beginning Jan. 1, 2021, and ending April 30, 2021, then employers would take the responsibility of paying the deferred taxes and not the employee. While the employer would have the right to attempt to collect these amounts from their former employee, it could be a difficult and time-consuming task. This may lead many employers to choose not to defer the taxes. The decision is left up to the employers to decide if they want to implement the deferral.
We strongly recommend that you as an employer consider the consequences of deferring the withholding of the employee payroll tax. For further questions, contact your CPA at https://www.ata.net/our-leadership/.
Listen to a podcast from the Journal of Accountancy on implementing the payroll tax deferral.