Tax Planning: Tips for 2020 Year-End Planning

Tax planning shows the most benefit when it is done throughout the year. 2020 is and was such a disruptive year that tax planning went on the back burner for many taxpayers.

Now that we are approaching year end, it is time focus on some of the steps you can take to lower your taxes.

Government Funding Due to Covid-19

The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act)

  • Net Operating Loss (NOL) Carrybacks. The CARES Act allows businesses to use current losses against past income for immediate refunds. As a result, NOLs arising in tax years beginning in 2018, 2019 and 2020 can be carried back five years for refunds against prior taxes. However, these deductions come with some restrictions, including when 2020 taxes are filed.
  • Disaster losses. The entire country was declared a disaster area due to the Covid-19 pandemic. This makes businesses eligible to fast track a refund for certain Covid-19-related losses. The claim for a refund may be available if the business files a 2019 amended return.
  • Charitable giving. The Tax Cuts and Jobs Act of 2017 (TCJA) raised the standard deduction in exchange for eliminating many itemized deductions, including the one for charitable giving, for individual taxpayers whose deductions do not meet a certain threshold. The CARES Act re-incentivizes charitable giving by:
    • Creating a $300 above the line deduction for qualified charitable contributions. This deduction is available to all taxpayers that take the standard deduction on their 2020 return.
    • Modifying the TCJA’s cash contribution limit to allow individuals who itemize to deduct cash contributions made to a public charity to up to 100% of their AGI (25% for corporations). The limits on donor advised funds and private foundations were not increased to 100%.
  • Withdrawals from retirement savings. The CARES Act allowed individuals facing Covid-19 related financial hardships to withdraw up to $100,000 from an IRA, 401(k) or 403(b) plan. To clarify, the $100,000 limit refers to the total amount withdrawn; it does not mean $100,000 from each account.

The CARES Act eliminates both the 10% penalty for withdrawals taken prior to age 59 ½ and the 20% withholding requirement. Withdrawn funds are taxed as ordinary income, but taxpayers can spread the income and taxes over a three-year period.

  •  Employment Tax Credits. Businesses that did not receive PPP funds and were fully or partially closed due to Covid-19 or who had a significant loss of income as compared to 2019 may be able to claim the employee retention credit.
  •  This tax credit is a refundable tax credit equal to 50% of up to $10,000 in qualified wages (including health plan expenses) per employee that was paid between March 13, 2020 and December 31, 2020.
  •  Tax relief may also be available for sick and family leave wages and related health insurance costs required to be paid due to the pandemic.

Retirement Planning

  • Make the maximum contribution to your 401(k) plan. For tax year 2020, the amount of deductible contributions to 401(k) plans are capped at $19,500 for taxpayers under age 50 and $26,000 for those over age 50. These limits apply to the individual, so if your spouse works in the business, he or she can also deduct up to that amount. The catch is that the contributions must be made through payroll deductions. Be sure to make the changes necessary to allow you to meet the maximum deduction.
  • Utilize a Defined Benefit Plan. If you have maximized your contribution to your 401(k) plan and want to save even more, a defined benefit plan is a good option. Like 401(k)s, savings in defined benefit plans are tax deferred. The due date to set up a plan is end of 2020.  Defined benefit plans must be funded by September 15, 2021, although they may be funded sooner.

Other Considerations

  • Qualified Business Income Deduction (QBI). Business taxpayers who earned $163,300 or less for single filers or $326,600 for joint filers may be eligible for a 20% deduction on their taxable business income. Other taxpayers may qualify for partial or full deduction dependent on their taxable income, employee wages and unadjusted basis of depreciable property.
  • Business expenses
    • If you have personally paid any business expenses in 2020, have the business reimburse you by December 31, 2020.
    • The Section 179 and bonus depreciation rules may make it beneficial to purchase equipment before the end of the year.

Keep in mind that this list offers only a brief overview of some available tax deductions and strategies. Many detailed rules apply, so be sure to contact your Nisivoccia tax professional at 973.298.8500 for the right advice for you and your business.