2020: A tax year to remember — or not
Considerations moving into tax season
November 2020 Footnote
Editor's note: Updated October 30, 2020
The 2020 tax season started off fairly benign. There were no major tax changes for 2019 other than the Secure Act, which didn’t really affect the 2020 tax filing season. We had a full season of preparing tax returns under our belt related to changes from the 2017 Tax Cuts and Jobs Act, and we were ready for the tax software to finally be in full compliance with those changes.
— the COVID-19 pandemic hit us right in the middle of tax season. Could we get tax returns done in time to meet the April 15, 2020, filing deadline or, even more importantly, were we going to be healthy enough to complete the returns? As tax preparers often do in sudden and drastic changing times, we persevered and adapted to serve our clients.
The first act
The first tax-related response by the federal government was the Families First Coronavirus Response Act (FFCRA). This mandated employers with 500 or fewer employees to provide two weeks of paid sick leave and then additional paid leave for employees affected by COVID-19. To help employers pay for this requirement, a refundable tax credit was available to fully offset the cost (in most cases).
To help with income tax processing, the U.S. Treasury Department issued several notices. A press conference on March 17 indicated the due date for tax returns would be July 15, 2020. The next day, the IRS released Notice 2020-17, indicating the extension was for payments only. The AICPA and others pushed back, so Notice 2020-18 was issued the following Monday, indicating the filing date was postponed, too. What about gift tax returns? The IRS issued Notice 2020-20, postponing that due date, too. Finally, on April 9, 2020, the IRS released Notice 2020-23, postponing all tax acts between April 1, 2020, and July 15, 2020, to July 15, 2020.
The CARES Act
Next, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. Major tax changes were included in this Act, along with the new Paycheck Protection Program (PPP). PPP loans were flying out the door at a fast and furious rate with minimal guidance from Treasury.
The Paycheck Protection Program Flexibility Act then increased the funding available and reduced the requirements for payroll costs to 60% from the Treasury-mandated 75% level and made it easier for employers to qualify for relief from the full-time equivalent (FTE) mandate. It is likely that further relief will be made for loans less than $150,000 for forgiveness.
PPP loan forgiveness is tax-free; however, the IRS determined that expenses related to forgiveness are nondeductible. As of this date, Congress has not overruled the IRS, but that could happen at any time.
Excess business loss
On the income tax side, many changes to provide economic incentives to taxpayers were implemented. The suspension of the excess business loss (EBL) rules for 2018–20 and the ability to carryback net operating losses by five years for 2018–20 will likely lead to many new amended tax returns or carryback filings. An unanticipated side effect of the EBL rules is that wages will not be considered business income starting in 2021. This may lead to substantial tax increases for clients with a large amount of wage income that has historically been offset by business losses. Also, the IRS may start to challenge wages more aggressively for S Corporation owners if large business losses are shown.
Employee retention tax credit
The employee retention tax credit is available for those employers who had business operations partially or fully suspended due to COVID-19. Essential businesses qualify if their revenues were reduced by at least 50% compared to the same quarter in 2019. The credit is up to 50% of qualifying wages with a maximum credit of $5,000 per employee. The credit is available for employers with fewer than 501 employees. If the employer has 100 or fewer employees, then all wages qualify. If there are more than 100 employees, only wages paid when the employee was not working qualify. However, if the employer received a PPP loan, then no credit is allowed.
Both the U.S. Senate and House have proposed expanding the credit and allowing it for employers who received a PPP loan as long as they don’t double count the same wages. Also, essential businesses now qualify as long as their income is 25% lower than the same quarter in 2019 (the Senate proposal). For many employers, the employee retention tax credit may actually exceed the value of the PPP loan if these proposals are implemented.
Adjustable taxable income limitation
Taxpayers subject to the business interest limitations now have favorable adjustments to the calculation of the adjusted taxable income (ATI) limitation. The 30% limit for 2019 and 2020 increased to 50% and taxpayers may elect to use their 2019 ATI when filing their 2020 tax returns. 2019 partnerships will continue to use 30% of ATI, but affected partners are allowed to deduct 50% of any 2019 excess business interest allocated to them on their 2020 income tax return.
Elections related to qualifying farms or real property businesses have been granted the ability to change or make new elections for returns filed in 2018 or 2019. Also, bonus depreciation-related elections can now be amended for 2017–19 tax returns. This is especially favorable if the changed elections increases a net operating loss that can be carried back five years to obtain tax refunds to increase the taxpayer’s working capital.
Use of IRAs
Congress also made it easier for taxpayers to obtain emergency funds from their IRAs. They may withdraw as much as $100,000 during 2020 without penalty. Income is reported on a pro-rata basis for three years (1/3 each in 2020–22). A tax-free rollover is allowed if the funds are recontributed to the IRA within three years of distribution. Amended tax returns may be required. To qualify, the taxpayer and/or family must either be directly affected by COVID-19 or have childcare issues related to COVID-19. This seems to be a low hurdle for most taxpayers, and no reconciliation of cost of COVID-19 related expenses is required.
An above line contribution deduction of $300 was added to provide an incentive for taxpayers to make contributions (not sure how much of an incentive this really is). Also, current-year cash contributions can offset 100% of AGI for individuals and 25% for C Corporations. For fiscal year corporations, a blended 10%/25% will be required.
The employer portion of Federal Insurance Contributions Act (FICA) taxes are allowed to be deferred, with 50% now due Dec. 31, 2021, and the remainder due Dec. 31, 2022. There is also a four-month deferral of the employee portion of FICA. This can be problematic for many employers and will likely be of limited benefit or use.
Bring on the complications
Several other more minor provisions have been enacted and year-end tax planning this year will likely be more complicated than in previous years. More variables such as bonus depreciation elections, net operating loss planning, employee retention credits, if available, all need to be reviewed and optimum options selected. Good luck with getting it right!
Paul Neiffer, CPA is a principal with CliftonLarsonAllen LLP. He writes a farm blog found at www.farmcpatoday.com and instructs CLA’s Farm Tax Update seminar sponsored by the MNCPA.
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