2020 Year-End Tax Planning for Business
It is December! It’s that time again for most businesses as the company’s
management considers strategies for the year end and the coming years. Unlike any
other year, 2020 has been a very tough year for many, even though the Congress
passed some major legislations during the year in response to the health and
economic impact of the COVID-19, many businesses are still struggling to survive. In
this article, we highlighted a number of matters that may assist you in the
considerations you are making for your business.
Under the CARES Act (Sec.2205) passed in 2020, charitable contribution deduction limit for a corporation is increased from 15% of taxable income to 25%. The increase only applies to tax year 2020. Therefore, for profitable businesses, if management has annual budget for charitable contribution, management may consider contributing more in 2020 and contributing lesser in the following years to take advantage of the increased deduction allowed for 2020 taxable year.
IRC Sec.179 Expense and 100% Bonus Depreciation
For property placed in service in tax years beginning after December 31, 2017, the IRC Sec.179 expensing limitation is $1 million with a phaseout threshold of $2.5 million (adjusted for inflation annually). In addition, the corporation can also take full and immediate deduction of 100% of the cost of qualified property purchased and placed in service after September 27, 2017, and before January 1, 2023. The bonus depreciation percentage will reduce after December 31, 2022. Management may strategize the timing for capital investment in current year and the years to come to take advantage of the accelerated depreciation deduction, as necessary.
Business Interest Deduction
Under the Tax Cuts & Jobs Act (“TCJA”), in general, for tax years 2018 and after, business interest deduction is limited to 30% of adjusted taxable income. In 2020, the CARES Act temporarily increases the adjusted taxable income limit from 30% to 50% for tax years 2019 and 2020. However, small businesses, whose average gross receipts of less than $25 million (adjusted for inflation), are not subject to the interest deduction limitation.
Meals and Entertainment
As you may have been aware, for tax years 2018 and after, entertainment expense is no longer deductible for Federal income tax purposes. Prior to 2018, business could take 50% deduction on expenses related to entertainment, and the tax treatment was the same as for most meal expenses; however, it is no longer such a case. As for meals, in general, those that are for business purposes, with client, for convenience of the employer, and meals purchased separately from entertainment (during an entertaining activity), the company can take 50% deduction. For holiday parties, company picnics, and other occasional employee appreciation events, the company can take full deduction of the expenses. In the past, many businesses recorded expenses on entertainment and meals under a common general ledger account; however, due to the new legislation, the company should separately record expenses on entertainment, meals – general (subject to 50% limitation), and meals – special events (100% deductible) to properly claim tax deduction.
Net Operating Losses
Under the TCJA, for losses arising in tax years 2018 and after, the NOL deduction is limited to 80% of the taxpayer’s taxable income, and carrybacks were no longer allowed. However, under the CARES Act, the 80% taxable income limitation for tax years 2018 – 2020 is suspended, and five-year carrybacks are allowed for NOLs incurred in tax years 2018 – 2020. If the company had taxable income in the year(s) that NOL carryback is applicable, NOLs must be carried back unless the taxpayers files an election to forego the carryback on a timely filed income tax return; otherwise, the unused portion that was supposed to carryback but not carried back is lost. The election to forego a carryback for an NOL arising in tax years 2018 or 2019 may be made by the due date (including extensions) of tax return for the first taxable year ending after March 27, 2020, the date of enactment for the CARES Act.
As the year-end is approaching, we understand that you have many things to consider for your business, we hope the above information may be useful to your business decision. Please do not hesitate to contact us if you have any questions.