2020 Business Tax Updates and Year End Planning Reminders
2020 has been an eventful year in many ways, including on the income tax front. We wanted to communicate several important business provisions and changes to you prior to the end of this year. Please contact your Bauman tax professional if you have any questions or would like further guidance on how these provisions and changes affect your unique tax situation.
Paycheck Protection Program (“PPP”) Loan Forgiveness and Expenses Funded with the Loan
- When a PPP loan is forgiven, the forgiveness is not taxable.
- The IRS has recently published an opinion that expenses paid with PPP funds are not deductible even if forgiveness has not yet been applied for or granted.
- The IRS opinion does not appear to be what Congress intended. It may be best to wait to apply for forgiveness until
- 2021 as Congress may address the issue in late 2020 or early 2021.
Net Operating Losses (“NOL”) – changes for 2018, 2019 & 2020 only
- An NOL carryback of up to 5 years is now allowed (previously, there was no carryback.)
- The carryforward deduction can be up to 100% of taxable income for losses carried from 2018, 2019 and 2020 (previously limited to 80% of taxable income.)
Fixed Asset Additions – Bonus Depreciation and Section 179 Deduction
- 100% Bonus depreciation is allowed (for federal tax purposes.)
- Section 179 asset expensing limits increased to $1.04 million for 2020.
Qualified Improvement Property (“QIP”) Depreciation
- QIP generally means improvements added to real estate after the original construction.
- The depreciation life for QIP was reduced to 15 years from 39 years. So, QIP is now eligible for 100% bonus depreciation.
- Affected taxpayers can amend prior year returns or file for a change in accounting method.
New Tax Form for 2020 – 1099-NEC
- The 1099-NEC replaces Form 1099-MISC for payments for services.
- The form is due to recipients by Feb. 1; The form needs to be filed with the IRS by March 1 (paper) or March 31 (e-filed.)
Wisconsin Entity Level Tax Election
- Allows electing Wisconsin S corporations and partnerships to pay state income taxes at the entity. level instead of at the owner level. The election effectively avoids the $10,000 Schedule A limit on state and local taxes, for taxes related to S corporation or partnership income.
- The IRS recently ruled in favor of this potential tax saving election.
- Generally, the election benefits higher income taxpayers so it is best to evaluate the costs/benefits before making the election.
2020 Planning Ideas
- Consider setting up and funding a retirement plan. New rules allow for setting up a plan after year end but before a tax return is filed for the year.
- Consider purchases of equipment prior to year-end.
- Consider accelerating payments of expenses/delaying collections of receivables if you are on the cash basis;
- Consider year-end bonuses.
- Employee retention credits could apply to employers who did NOT receive PPP loans.
- Consider implementing Individual Coverage Health Reimbursement Arrangements (ICHRAs) for 2021.
- Consider a cost segregation study for real property used in a business. This can allow you to catch up on depreciation deductions for parts of the building classified as shorter-lived assets.
2020 Individual Tax Updates and Year End Planning Reminders
2020 has been an eventful year in many ways, including on the income tax front. We wanted to communicate several important individual provisions and changes to you prior to the end of this year. Please contact your Bauman tax professional if you have any questions or would like further guidance on how these provisions and changes affect your unique tax situation.
- There is a new $300 “above the line” deduction even if you do not itemize your deductions.
- Just a reminder, you need a written acknowledgement from a charity for any donation of $250 or greater.
- If you don’t itemize deductions and are age 70 1/2 or older, consider contributions to a charity directly from your IRA account (a qualified charitable distribution or “QCD”.)
2021 Elections for Employer Flexible Spending Accounts and Health Savings Account Contributions
- Consider expenses you may have coming up in 2021 (health care, dental work, etc.)
Required Minimum Distributions (“RMD”)
- The age to start taking RMDs changed from 70 1/2 to age 72.
- RMDs are not required for 2020.
- Consider converting any previously scheduled RMDs for 2020 into a Roth IRA.
Traditional IRA Contributions
- Individuals of any age can now make contributions to a traditional IRA.
Retirement Plan Withdrawals – 10% Penalty Exceptions
- Up to $5,000 in distributions can be taken penalty free for expenses related to the birth or adoption of a child.
- The 10% early withdrawal penalty does not apply to Coronavirus related retirement plan or IRA distributions of $100,000 or less in 2020. The distributions are generally taxable but there are favorable provisions to allow for the tax on the distributions to be paid over a three year period.
Stimulus Payments (Also Called Economic Impact Payments or “EIP”)
- The payments received in 2020 are not included in gross income.
- There is a Recovery Rebate Credit available if the maximum payment was reduced due to using a taxpayer adjusted gross income amount from 2018 or 2019.
Miscellaneous Items and Extender Provisions for 2020
- If you receive 1099 forms for services you provide to others, you may receive a new form 1099-NEC (nonemployee compensation) this year.
- Section 529 education savings plans can now be used as a source of funds to pay up to $10,000 per year of student loan payments.
- Several exclusions and deductions have been extended for 2020:
- Exclusion from gross income for discharge of debt income from qualified principal residence
- Tuition and fees deduction for higher education expenses
- Nonbusiness energy property credit
- If you itemize deductions:
- Medical expense deduction calculated based on 7.5% of adjusted gross income
- Deduction for mortgage insurance premiums