As we near the halfway point in 2020 and look back at the past six months, a lot has changed. With the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the federal government launched a wide-ranging set of initiatives to help individuals and businesses at a time when the coronavirus pandemic was impacting all aspects of our lives. While many of the provisions of the CARES Act such as the Paycheck Protection Program received much of the attention, there are several other provisions of the program that are a form of tax relief. Here are six tax changes that every business owner should know as you plan for the remainder of 2020:
- Net Operating Loss Deductions
A net operating loss (NOL) allows you to carry a loss into a different tax year to offset taxable income. Under a provision in the Tax Cuts and Jobs Act (TCJA) of 2017, an NOL from 2018 to 2020 was limited in the amount of income that it could offset (80% maximum) and it could not be carried back to previous tax years. The CARES Act has changed those provisions to now allow for the following:
- The net operation loss deduction limitation on greater than 80% of taxable income is suspended until 2021;
- Businesses that created an NOL in 2018, 2019, or 2020 can now carry the loss back up to five years to offset tax rates before 2018 (which were higher than they are now).
The carryback provision is especially generous because it allows businesses to amend returns and reduce taxable profits for pre-2018 tax years when the tax rates were higher than today’s tax rates. Additionally, for tax years beginning after 2020, the CARES Act allows for:
- NOL deductions equal to the sum of 100% of NOL carryovers from pre-2018 tax years plus the lesser of:
- 100% of NOL carryovers from post-2017 tax years, OR
- 80% of remaining taxable income (if any) after deducting NOL carryovers from pre-2018 tax years.
Although the easing of the NOL rules will be positive for many businesses that have losses, be sure to work with your tax preparer, as using these new NOL rules may limit your ability to use some other income-related deductions that you may have taken in previous tax years. Additionally, you will need to amend state returns for past years as well.
- Modification of Limitation on Losses for Pass-through Business Owners
The Tax Cuts and Jobs Act changed the way business owners with pass-through entities (i.e., S corporations, partnerships, sole proprietors, etc.) could use active losses to offset other forms of income. Starting in 2018, a taxpayer filing jointly could only use $500,000 in losses to offset wage or capital gain income tax liability. The CARES Act temporarily modifies the loss limitation for pass-through entities so that taxpayers can deduct excess business losses arising in 2018, 2019 and 2020. With the change, a taxpayer may now be able to deduct an unlimited amount of “excess losses” against income from other sources, such as wages and investments. The change applies to 2018 and 2019 retroactively, along with 2020. Taxpayers impacted by this change may be able to file amended returns and get refunds of substantial amounts for previous tax years.
- Employee Retention Tax Credit
The Employee Retention Tax Credit is extended to businesses who were forced to close their doors temporarily or to those who lost at least 50% of their gross receipts due to COVID-19. The credit is a refundable payroll tax credit of up to $5,000 per eligible employee through the end of 2020. The credit is available to any size employer; however, businesses with more than 100 employees can only claim the credit for inactive employees who are still being paid, while smaller businesses can claim it for all employees.
- Employer Payroll Tax Delay
The CARES Act allows employers to delay paying their portion of employees’ Social Security taxes during the rest of 2020, which amounts to 6.2% of wages. Employers have to pay half of the delayed taxes by the end of 2021 and the remaining half by the end of 2022. All employers can take advantage of this deferral.
- Increased Business Interest Limits
The amount of deductible interest was raised from 30% of adjusted taxable income to 50% of adjusted taxable income. The deduction increase is good for 2019 and 2020. This will be advantageous to businesses with lots of debt.
- Qualified Improvement Property (QIP) Fix
The TCJA expanded bonus depreciation rules to allow a 100% write-off of certain property; however, QIP property was excluded from bonus depreciation. The CARES Act fixed that error, so businesses can immediately deduct 100% of the cost of improving facilities rather than having to depreciate the improvements over a much longer schedule.
While the events of 2020 have had a tremendous impact on many businesses and business owners, the tax relief provisions may be able to ease the tax and cash flow burdens of some of those businesses. CCMI’s team of CERTIFIED FINANCIAL PLANNERTM professionals assist many business owners facing challenges with their finances and is happy to serve as a resource as you evaluate the tax impact on your business and personal finances. Give us a call if we can be of assistance.
CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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