Between the pandemic and the election, 2020 has resulted in an interesting tax year for many businesses as they face potential policy changes or other unique financial situations. To combat the anxiety of tax season, we reached out to local expert Tiffany Kawasaki, CPA and founder of Kawasaki Tax & Consulting in Newcastle, to help us navigate these uncertain times.
Kawasaki has been in the industry 10 years, focusing on taxes for individuals and small businesses as well as assisting people with international tax-related issues. She also is an extension lecturer for the Global Business Program at the University of Washington.
“We are talking about some serious shifts in deals with regards to taxes, and a lot of that is going to be balanced by not just the presidency change, but (also) the House and the Senate,” Kawasaki said of the current tax season. “All of the tax planners right now and financial advisors are looking to see what is realistic for being completed not only in 2020, but looking to 2021 to see if we need to make major shifts.”
Due to this uncertainty, Kawasaki encourages small-business owners to call their tax advisors to make sure that they have addressed some of the following issues.
1. Paycheck Protection Program (PPP) Loans
This program was a huge relief to many small businesses back in April. Small businesses need to be aware that the IRS released additional guidance in November. The AICPA is pushing Congress for the deductibility of PPP-funded expenses. As of early December, there is no expected change to the current guidance, which states that since small businesses aren’t taxed on the proceeds of a forgiven PPP loan, the PPP-funded expenses are not deductible. No tax benefit and no tax harm is the theory. The difficulty arises with the timing of the forgiveness. Taxpayers who reasonably expect their loan to be forgiven in the future, cannot deduct the expenses related to the loan regardless of whether the business filed for forgiveness or not. Small businesses should make sure that they take this into consideration when planning for their 2020 tax liabilities.
2. Accelerate Your Refund
The CARES Act temporarily lifted some of the restrictions on the net operating loss (NOL) carryback rules. A five-year carryback is permitted for NOLs arising in tax years beginning 2018, 2019, and 2020 and the 80 percent limitation is temporarily suspended. Carrying back your refund into years where the corporate tax was 35 percent versus 21 percent could result in an even larger refund. If you had NOLs in 2018 or 2019 and you don’t want them to be carried back, you can elect out of the carryback with your 2020 tax return filing.
3. Capital Assets
If you didn’t make those large capital asset purchases before the end of 2020, you may end up with a greater tax savings by making a 2021 purchase. Capital assets purchases can be a great way to reduce your taxable income and the Tax Cuts and Jobs Act (TCJA) has favorable bonus depreciation guidelines. The bonus depreciation draﬅ ing error in TCJA was remedied in the CARES Act. We are potentially facing a period with rising taxes. The Biden tax plan includes increasing corporate tax rates from 21 to 28 percent, which might provide just the right amount of incentive to make that purchase in 2021.
4. Business Interest
First we had fully deductible business interest, then TCJA limited it to 30 percent of adjusted taxable income (ATI). In 2020, the CARES Act expanded the C- and S-Corporate interest expense limitations to 50 percent of ATI for 2019 and 2020. You can also elect to use your 2019 adjusted taxable income rather than 2020 income for the limitation.
5. Payroll Tax Holiday
Normally, employers deposit payroll taxes with the IRS under a strict schedule. Another COVID-19 tax change for 2020 was the option to defer eligible employees Social Security payroll taxes between September and December. I remind my clients that this was not a tax cut, it was a deferral.
6. The most important tip? Talk to your tax advisor.
(This) was a unique year, between the election and the pandemic. This makes 2021 a difficult year for tax planning. We may be facing increases to tax rates in 2021. Traditional tax-planning techniques that advise deferring income and accelerating expenses may not be the best for your situation. Based upon the tax-rate changes that are projected, taxpayers should plan to speak to their advisors early and address the many options or elections that may help them minimize not just 2020 taxes, but also 2021 taxes.