As business owners, we know year’s end is the time most companies are looking for ways to minimize their tax liability. This year, there are special considerations as a result of the Coronavirus Aid, Relief and Economic Security (CARES) Act, which presents some unique planning opportunities. Whether your business has flourished or struggled during 2020, consider how these items may apply to your business and adjust your tax strategy accordingly:
Large Depreciation Deductions
Tax laws currently allow for accelerated depreciation through Section 179 deductions or “bonus” depreciation, with certain phase-outs and restrictions. If you place qualified property in service before the end of the year, you may be able to write off most (or all) of the cost in 2020. Contact us for details of all the phase-outs and restrictions, but in general, if you are in need of new or used equipment, this could be a great place to start in looking for a deduction to lower your taxes this year.
Impact of Paycheck Protection Program (PPP) Loans
The PPP was created under the CARES Act to help small businesses cover employee salaries and other expenses. If certain conditions are met, these loans may be fully forgiven. Although the CARES Act specified that forgiveness of PPP loans would not create taxable income, the IRS indicated that otherwise deductible expenses, such as payroll costs, will not be tax deductible if they were funded with PPP loans. While there may yet be legislation that changes this conundrum, for the purposes of 2020 tax estimates, you may have taxable income you weren’t originally expecting.
Payroll Tax Deferral
The CARES Act allowed businesses to defer their 6.2 percent share of Social Security payroll taxes for the period between March 27 and December 31, 2020. Half of the deferred amount is due at the end of 2021 and the other half at the end of 2022. If you used this program, make sure you have a plan to meet these future liabilities.
Net Operating Losses (NOLs)
If your business has struggled this year after having success during previous years, the CARES Act provides a gift in the form of net operating loss carryback: a five-year carryback period for NOLs incurred in 2018, 2019, or 2020 that may lead to an immediate refund. You’ll have the option to amend past returns or carry losses forward to future tax years. Starting in 2021, NOLs will only be carried forward, subject to limitations as detailed in the Tax Cuts and Jobs Act (TCJA).
Funding a Retirement Plan
While many business owners stick with contributions to a personal IRA, you have the option to save more depending on your business, employees, and intentions by funding an employer-sponsored retirement savings plan such as a SIMPLE IRA, SEP IRA, 401(k), or profit-sharing plan. Contributions you make for yourself and employees may be tax deductible, but certain limits and restrictions apply. We are big fans of saving for retirement, as it not only lowers your taxes, but provides future security for you and your employees alike.
Shifting Income and Expenses between Years
If your business is less profitable in 2020 than you think it might be in 2021, and you operate on a cash basis, consider shifting income into 2020 (if possible) by increasing collection activities or invoicing early. Alternatively, you could look at shifting expenses to give yourself more deductions in a higher income year, such as paying bonuses in January rather than December.
Bad Debts
In a year when many small businesses are struggling, there are likely to be some businesses with a large number of outstanding receivables/collections. Increase your collection activities now and work with your CPA to determine what would be needed to write off the debt as a business bad debt this year. Business bad debts are generally claimed in the year they become worthless. There are certain qualifications your writeoff would have to meet, but if you think it is unlikely you are ever going to get paid, you might as well make lemonade out of the lemons.
Charitable Giving
If you plan to give to a charity, look to maximize your giving and make sure you get a tax benefit from your gift. If you claim the standard deduction, you generally don’t get to write off charitable gifts. However, in 2020, you can deduct up to $300 in cash contributions to certain charities. If you are an itemized filer, work with your CPA and CFP® professional to maximize your charitable deduction by bunching gifts in higher income tax years.
There are other tax strategies you may consider that we previously covered in blogs about Roth conversions and 2020 tax changes. However your business finishes 2020, evaluating the impact of the strategies above may help to maximize your cash flow by minimizing your taxes. As advisors to business owners, we regularly work with entrepreneurs on strategies that maximize their long-term cash flow and value. Give us a call if you want to talk about your long-term planning options.
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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