Q: What impact could Paycheck Protection Program (PPP) loan forgiveness have this tax season?
A: One of the biggest unknowns heading into the 2020 (2021) tax season centers on PPP loan forgiveness. As a reminder, the CARES Act was passed back in March of 2020. It had many facets and features designed to assist individuals and small businesses survive during the havoc that was believed to be wreaked upon the economy due to the coronavirus. I think most economists and financial people agree that the act helped to stabilize the economy to some degree. One part of the act was the PPP loan, which allowed businesses to apply for and obtain a loan from the Small Business Administration.
The loan became extremely popular as the act provided a way for the borrower to have a portion or all of the loan forgiven if the monies were spent in very specific areas such as payroll, rent, utilities, retirement matching and employer-paid health care premiums, among others, in a specific time period. If the borrower laid off employees or reduced pay during the covered period of the loan, then the forgiveness amount would be reduced.
The act states that the forgiveness of the loan funds will not be taxable under the tax code. It also states that the covered expenses used in the forgiveness calculations will not be deductible for the year in which those expenses were paid (2020). As we are now nearing the end of the year with those covered periods expiring, borrowers are faced with the reality of those expenses being disallowed as a deduction, which is effectively causing the PPP loan funds received to be taxable.
The thing to keep your eye on is whether Congress steps in and changes this taxability issue. Many people in Washington, along with other organizations such as the American Institute of Certified Public Accountants, are lobbying to get this changed, as they do not believe this was the intent when the act was passed. There could be some strategy involved in filing 2020 returns when it comes to this waiting game. Most of our clients want to go ahead and apply for the forgiveness of the loan but possibly wait to file their returns until Congress has acted.
Q: What can we expect with all of the changes in Washington?
A: One of the most difficult things to do is help a client with long-range planning. Once upon a time, in a galaxy far, far away, long-term planning was much easier because we knew the tax code was somewhat stable. We could more than likely tell you what the tax rates and deductible items would be 10 years ahead. That luxury was thrown out of the window a number of years ago and now seems as far away as pre-COVID times. Years ago when our leaders began to let the budget funding almost lapse, sometimes resulting in government shutdowns, we began to get some negotiated tax tweaks to assist with the budget. There were times this happened in November or December and would become retroactive as of the beginning of the same year. This makes planning almost impossible as there is precedent to change the rules of the game after it has already started.
In 2018, the Tax Cuts and Jobs Act (TCJA) was passed, the largest change in the tax code in 30 years. The Republicans saw this as an opportunity to shape the tax code, which they believed, at the time, was more favorable to the other side of the aisle. The widespread changes in TCJA affected everything from personal exemptions to the estate tax exclusion. This definitely changed how we assisted our clients in planning for the next year and for the longer term.
Fast forward to November 2020. The Democrats won back the White House, and all eyes were on a couple of Senate runoff elections in Georgia, which could have massive impacts in how successful Democrats will be in passing tax legislation. President-elect Joe Biden has laid out his tax plans, which call for sweeping changes that will no doubt keep CPAs and financial advisors busy for the foreseeable future.
The best we can do is plan based upon the current tax law with one eye looking toward possible changes. We have had conversations with clients since the election about possibly not entering into a 1031 exchange when selling property but instead paying capital-gains taxes now as those rates will most likely never be lower than they are today. Other conversations have centered on electing portability when a spouse dies. With the estate tax exemption north of $11 million per person, filing portability of the deceased spouse’s exemption to the surviving spouse seems unnecessary, but the Biden plan is to reduce this exemption back to $5 million per person along with disallowing a step up in basis in assets at death.
Q: What are the biggest tax advantages for businesses and individuals for 2020 and 2021?
A: We have definitely had a busy year or two for tax law and assistance during the pandemic. Here are a few items to think about and of which to be aware:
a) Stimulus — The CARES Act included a refundable tax credit worth as much as $1,200 for individuals and $500 for qualifying children. The tax credit is for the 2020 tax return but was paid out in early 2020 to pump money into the economy. Many people received their check, but many did not for various reasons. If you did not receive the check, all is not lost. There will be a form on the tax return filed for 2020, and if you are eligible for some part of the stimulus and have not received it early, you will get the credit at that time.
b) Required Minimum Distributions (RMD) — The SECURE Act changed the age at which you have to take an RMD from 70½ to 72. This can be very beneficial to you by delaying taxable income by a couple of years and continuing to let your retirement savings grow without touching them. If you have already begun taking distributions, then the extension to age 72 would not apply.
c) Net Operating Losses (NOL) — This area has changed a couple of times with a pre-TCJA, TCJA, and now the CARES Act rules. TCJA removed the ability to carry back NOLs and only allow a deduction of 80 percent of carry-forward losses. The CARES Act temporarily reset the treatment of NOLs to pre-TCJA rules. If you as an individual or business had an NOL in 2018 or 2019, or have one in 2020, you are allowed to carry those back up to five years to receive an immediate refund.
d) Qualified Improvement Property (QIP) – When TCJA was passed so quickly, there were drafting errors. The one that had the most impact was with QIP, which is any improvement to an interior portion of an existing nonresidential building excluding enlarging the building, adding elevators or escalators or work to the internal structural framework of the building. It is assumed that in drafting the bill, Congress failed to assign QIP a 15-year recovery period, which would make it eligible for bonus depreciation. This is an area that many CPAs and business owners lobbied to have corrected, and the CARES Act included a technical correction to change QIP to the 15-year recovery period rendering it eligible for bonus depreciation. The change was made retroactive as of Sept. 27, 2017 (the date of the original change with TCJA) and allows taxpayers to amend prior tax returns of file for a change in accounting method on their 2019 or 2020 tax returns. Essentially, a taxpayer may be able to write off the entire improvement in one year.
READ MORE: The Taxman Cometh: Experts Weigh in on the Dynamics of Tax Policy in 2021
