2020 year-end tax letter

As we write our annual tax-planning letter, we are constantly reminded that this is no ordinary year. The fall continues to be dominated by a highly partisan election, a second wave of COVID-19, an economy struggling to recover from the worldwide pandemic and a wildly fluctuating stock market.

Adding to this mix of uncertainty is the ever-changing tax landscape. 2020 has seen not only continued guidance relating to the Tax Cuts and Jobs Act (TCJA), but also the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act contains numerous revisions to the TCJA, which in some cases require taxpayers to redo returns two years after the fact. The CARES Act also introduced the PPP loan program, the rules for which were written hastily and leave several important questions still unanswered.

All of this created a perfect storm for taxpayers — businesses and individuals alike. Besides continuing economic uncertainty, tax rates could be in play depending on the election results. The prospect for increasing rates could hinge on control of the Senate, especially if the Democrats win the White House. While a change in control of the House of Representatives is not anticipated, if Republicans retain their majority in the Senate, it is unlikely any meaningful rate changes would be enacted.

In addition, the economic downturn, coupled with trillions of dollars of enacted stimulus legislation, has created a federal deficit exceeding $3 trillion annually. At the end of June (the close of the government’s third quarter), the deficit represented 13.1% of GDP, a level not seen since World War II. To reduce this amount, anticipate either higher tax rates or a combination of spending cuts and restrictions on deductions. In terms of limiting deductions, remember the business interest limitation using 30% of adjusted taxable income is temporarily increased to 50% through 2020 (returning to 30% in 2021). Furthermore, 100% bonus depreciation is set to expire for assets placed in service after Dec. 31, 2022. Congress may choose to limit other deductions in attempts to raise revenue.

While many are facing difficult times, business does not stand still. Solid financial and tax planning is needed now more than ever. With our year-end letter, we have always urged readers to not only do their annual tax planning, but to use this period to conduct a full financial review of their portfolios and estate planning as well. This year, such a financial review is not just recommended, it is critical.

In the coming weeks and months, managing cash and minimizing current taxes is even more important as the economy recovers. The CARES Act presents some one-time opportunities for taxpayers to reduce taxes and obtain refunds from prior years. For example, while the TCJA had repealed the net operating loss (NOL) carryback rules, the CARES Act reinstated them for 2018, 2019 and 2020 losses. If you have a taxable loss in 2020, careful analysis is needed to maximize the tax benefit of such loss since a 2020 loss can be carried back five years. However, losses incurred in 2021 will no longer be eligible for any carryback. As a result, this represents your last chance to recover tax payments made in 2015 through 2019. If you need cash currently, look into filing an NOL carryback return as soon as possible after year-end to expedite your refund.

In addition to these NOL changes, our 2020 year-end tax-planning letter focuses on tax topics with the above economic and political backdrop in mind. We examine multiple pieces of CARES Act and TCJA guidance (including Paycheck Protection Program debt forgiveness, the employee retention credit and payroll tax deferral), analyze pass-through loss and cancellation of indebtedness strategies, summarize tax capital reporting, define the home office deduction as well as review a myriad of international and state and local tax changes.

As always, your Baker Tilly advisor is ready to assist you in meeting your financial and tax objectives. Contact an advisor

Visit the sections below for more information about the most pressing year-end tax issues:

• Business interest limitation rules (section 163(j)) – Where do we stand?
• Will refunds from losses become a lifeline for struggling businesses?
• Loan modifications: Take care of them so they don't take care of you
• Lease modifications: Beware of potential tax ramifications
• Tax issues created by PPP loan forgiveness
• Limited liability companies in a loss environment
• Carried interests in 2020 and beyond
• Final 2020 bonus depreciation regulations
• Partnership tax capital – 2020 reporting requirements loom
• Employee benefits and executive compensation update
• Proposed regulations issued to implement TCJA small business taxpayer simplified accounting methods
• Home office deduction
• Opportunity zones – reminder of COVID-19 relief and remaining areas of uncertainty
• Residency rules and state trust taxation – Beware the traps
• State and local tax update
• U.S. international tax update

Conclusion

We will continue to keep you informed of the latest developments by sending updates to assist you with planning throughout the remainder of the year.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

For more information on this topic, contact our team.