The COVID-19 pandemic dramatically altered the landscape for American businesses in 2020. As a result, several traditional year-end business tax planning strategies may no longer be beneficial to you this year. At the same time, there are new opportunities for you to incorporate tax-saving techniques, which have sprung from recent federal tax relief legislation, that can minimize your tax liability. The following are some of the main areas businesses should be focusing on to improve their 2020 tax outlook.
Claiming Credits and Refunds
There are several ways businesses can claim credits and refunds to help offset the economic impact COVID-19 has had on their organizations. Some of the year-end business tax planning strategies owners can use to capture credits and claim refunds include a closer look at the alternative minimum tax (AMT) and net operating losses (NOLs).
Alternative Minimum Tax (AMT)
A provision in the CARES Act allows for businesses which are experiencing cash flow issues to accelerate the timeline for claiming AMT credits that have gone unused.
Although the Tax Cuts and Jobs Act (TCJA) made the corporate AMT obsolete, it permitted businesses to claim unused credits incrementally, in tax years 2018, 2019, and 2020. For tax years beginning in 2018 through 2020, 50% of the excess of AMT credit carryovers that exceed regular tax liability is refundable. Additionally, any remaining credits are fully refundable in 2021.
Under the CARES Act, businesses can claim all remaining credits in 2018 or 2019, which essentially allows them to gain immediate access to refunds. By filing Form 1139 (“Corporate Application for Tentative Refund”) by December 31, 2020, business owners can claim the credits without having to amend their 2018 tax returns.
Net Operating Losses (NOLs)
The CARES Act also loosened the rules for net operating losses (NOLs), temporarily. The TCJA limited the NOL deduction to 80% of taxable income and removed the ability to carry back NOLs to prior years. Under the CARES Act, however, NOLs from 2018, 2019, or 2020 can be carried back five years so that business owners can claim refunds of taxes paid in previous tax years. NOLs can completely offset income for 2018 through 2020, as there is no limitation on taxable income for years beginning prior to 2021.
Another year-end business tax planning strategy to consider is carrying back NOLs to years when high tax rates were in effect (prior to the enactment of the TCJA) in order to realize larger refunds. It’s important to be aware that carrying back NOLs can trigger a recalculation of other tax deductions, such as AMT credits or research and development credits, so you’ll want to carefully consider whether or not to utilize this tactic before you execute.
Capitalizing on Qualified Improvement Property
The CARES Act remedied a drafting error in the TCJA that made qualified improvement property (QIP) ineligible for bonus depreciation – particularly those improvements that were made to the interior of a property and pertained to nonresidential real property. As capital investments are an effective means by which businesses can reduce their income taxes, the correction provides a year-end business tax planning strategy that had not been available to business owners in recent years. As a result of the revision included in the CARES Act, businesses can claim an immediate tax refund for the bonus depreciation for qualified improvements they made in 2018 or 2019 which they missed out on when the TCJA rules were the only rules in effect.
Qualified property includes office furniture, purchased software, computer systems, vehicles, machinery, and equipment.
Under the CARES Act, businesses can now deduct 100% of the cost of new and used qualified property in the first year the property has been placed into service, provided that the property was purchased after September 27, 2017 and before January 1, 2023. The deduction is subject to certain conditions and special rules apply to property with a longer production period.
Managing Business Interest
The TCJA generally limits the deduction for business interest expense to 30% of adjusted taxable income (ATI). For the 2019 and 2020 tax years, the CARES Act allows C- and S-corporations to deduct up to 50% of their ATI (special partnership rules apply for 2019).
The law also allows businesses to use their 2019 ATI in their calculation, instead of their 2020 ATI. For many businesses, using 2019 ATI will increase the deduction amount. Shifting business interest deductions from 2019 to 2020 in order to increase 2019 ATI is another year-end business tax planning strategy that can be considered.
Deductions for Payroll Tax
Businesses as well as those individuals who are self-employed are permitted, under the CARES Act, to delay payments of the employer share of the Social Security payroll tax which is set at 6.2% of wages. These taxpayers can pay the tax over the next two years, with the first half due by December 31, 2021, and the second half due by December 31, 2022.
It’s important to note that adhering to these dates will affect 2020 taxes, as businesses generally aren’t allowed to deduct their share of payroll taxes until the actual payments have been made.
Many of these year-end business tax planning strategies require additional filing requirements, such as amending prior tax returns or submitting applications for potential refunds or for changes in accounting method. Consult with your Untracht Early advisor to discuss the options that make the most sense for your business and to ensure that the proper filing requirements are being addressed. For more year-end business tax planning strategies, access our 2020-2021 Tax Planning Guide here.