Year End Tax Planning Tips: 2020 Edition

Tax planning in any year is important but it is more important than ever in 2020 due to the COVID-19 pandemic. Fortunately, U.S. Congress enacted several tax law changes in 2020 to aid individuals and businesses affected by the pandemic. The IRS also released their 2020 federal income tax brackets that will determine how much tax you owe. Here’s a guide to maximizing the recent tax law changes and minimizing your tax bill.

Earlier this year, U.S. Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide economic assistance and relief to American workers, families, and small businesses. As such, the CARES Act includes numerous opportunities to lower your tax bill and receive refunds faster.

Let’s discuss a few tax law breaks brought on by the CARES Act:

Businesses

1. Defer Income and Accelerate Deductions. For tax purposes, generally income is taxed in the year received and expenses can be deducted in the year paid. You can use that to your advantage by deferring the receipt of income until after December 31st and making payments or planned purchases prior to year end. You will be able to lower your taxable income and increase deductions. This strategy can also be used to maximize the QBI deduction. Make sure you forecast your income and growth for the next year before taking this step. It is worth noting that you should not defer the receipt of income if you anticipate being in a higher tax bracket next year. If you do anticipate being in a higher tax bracket next year, then it may make sense to do the opposite.
2. Use disaster losses for quicker refunds. Generally, businesses can claim certain disaster losses on a prior year tax return in order to receive a faster refund. Since all 50 states were designated as disaster areas, just about every U.S. business is eligible for refunds from certain disaster losses. Businesses can claim a COVID-19 related disaster loss occurring in 2020 on a 2019 amended return for a quicker refund. To qualify, the loss must be COVID-19 related and satisfy several other requirements.
3. Use NOLs for quick refunds. The CARES Act now allows businesses to use current losses to offset past income for immediate refunds. Net operating losses (NOLs) arising in tax years beginning in 2018, 2019 and 2020 can be carried back five years to reduce income in prior tax years possibly creating a refund. The refund will flow through to individuals who own a partnership or S Corp while C corporations make NOL refund claims themselves. You can file a tentative refund claim by Dec. 31, 2020 (for the 2019 calendar year) to obtain this refund.
4. Retroactive refund for bonus depreciation. Bonus depreciation allows companies to immediately deduct the full cost of assets or investments including qualified improvement property (QIP). QIP is almost any improvement to the interior of a building that is either owned or leased. The CARES Act now allows retroactive deductions dating back to Jan. 1, 2018. If you filed 2018 and 2019 returns before the law changed you take the deduction in 2020 with an accounting method change, or amend both the 2018 and 2019 returns.
5. Payroll tax deferral. If your business is facing cash flow issues, the CARES Act allows employers and individuals to defer paying their 6.2% share of Social Security tax to future years. If adopted, businesses will have to pay the first half of the deferred amount by Dec. 31, 2021, with the other half being due by Dec. 31, 2022.

Individuals

1. Understanding your stimulus check payment. Earlier this year, millions of individuals received stimulus payments up to $1,200 per taxpayer and $500 per qualified child dependent via the CARES Act. Stimulus payments are not income so you will not have to pay tax on it. The payments were based on prior year tax returns and are treated as a fully refundable tax credit for 2020. Although no tax is owed on stimulus payments, you will need to report it when you file your 2020 taxes.
2. Report unemployment income. The IRS considers unemployment income to be taxable income. If you received unemployment compensation, look out for Form 1099-G which lists the total payments that you must report on your 2020 tax return. The additional $600 you received will be taxable as well so make sure it is reported. Please note, most states consider unemployment compensation as taxable income. Check with your state authorities to confirm.
3. Claim the $300 charitable deduction. You can now take an above-the-line up to $300 for cash contributions if you don’t itemize. Since the TCJA increased the standard deduction, many taxpayers didn’t get the benefit of a charitable deduction since they couldn’t itemize. Those taxpayers can now take an above-the-line deduction up to $300 if they donate before yearend. Consider donating to your favorite qualified charity.
4. Take a coronavirus related distribution (CRD). Individuals impacted by the COVID-19 pandemic can now withdraw up to $100,000 from their 401(k)s and IRAs with fewer penalties. Under the CARES Act, a CRD would not be subject to the early withdrawal penalty nor the required federal tax withholding. You can include the entire distribution in your 2020 taxable income or ratably over a three-year period, starting in 2020. If you repay the distribution within three years, you can claim a refund for the taxes paid. CRDs are available to individuals who experienced adverse financial consequences caused by COVID-19. Read more about CRDs here.
5. Consider investing in an opportunity zone. Opportunity Zones are tax incentives to invest in low-income and undercapitalized communities. Individual or corporations with capital gains are eligible to receive the following benefits:
   1. Tax deferral on previously earned capital gains. Existing capital gains will not be taxed until 2026 or when the asset is sold.
   2. Basis step-up. After 5 years, investors’ basis on the original investment increases by 10 percent. After 7 years of investment, investors’ basis on the original investment increases by 15 percent.
   3. Permanent exclusion of taxable income on new gains. Investors pay no taxes on any capital gains if investment is held for at least 10 years.
6. Avoid underpaying estimated taxes. Don’t get penalized for not withholding enough taxes during the year. If cash flow was an issue earlier in the year, now may be a good time to make additional estimated payments or increasing your withholding to make up for any shortfall.

Before taking advantage of any of these provisions, it is best to discuss your tax situation with a qualified CPA. If you have questions or would like to discuss tax or accounting matters with us, please email us at colin@horsfordcpa.com or call us at (347) 201-2045.