Tax Planning Strategies for 2020 Year-End



It has been a long year for tax professionals, auditors and all manner of financial advisors as their clients rely on them for guidance in uncertain times. The COVID-19 pandemic is unquestionably the greatest uncertainty many Americans have ever faced, with long-reaching impacts on national health, the economy and bottom lines. Measures taken by Congress to mitigate these impacts were necessary but also heavily coupled with the nation’s tax code. As year-end tax preparation looms, businesses and individuals will need an innovative strategy to maneuver through the intricacies of this year’s tax code.

According to the national managing partner of Tax Service at Grant Thornton, LLC, Renato Zanichelli, “Year-end tax planning is more important than ever this year,” and having the right tax strategy will make all the difference in the new year, CPA Practice Advisor reports1.

Like many in the financial planning space, Grant Thornton, LLC has put forth several guides for businesses and individuals comprised of key considerations for 2020 year-end planning. Accelerating AMT refunds, using current losses for quick refunds, utilizing retroactive refunds for bonus depreciation, claiming quick disaster loss refunds and planning the timing of the CARES Act payroll tax deductions are chief among their recommendations for businesses evaluating their strategies.

Accelerate AMT refunds. When the Tax Cuts and Jobs Act (TCJA) repealed the corporate alternative minimum tax (AMT), it allowed corporations to claim all their unused AMT credits in the tax years beginning in 2018, 2019, 2020 and 2021. The Coronavirus Aid, Relief, and Economic Security (CARES) Act accelerates this timeline, allowing corporations to claim all remaining credits in either 2018 or 2019. This gives companies several different options to file for quick refunds. The fastest method for many companies will be filing a tentative refund claim on Form 1139, but corporations must file by Dec. 31, 2020 to claim an AMT credit this way.

Use current losses for quick refunds. The CARES Act resurrected a provision allowing businesses to use current losses against past income for immediate refunds. Net operating losses (NOLs) arising in tax years beginning in 2018, 2019 and 2020 can be carried back five years for refunds against prior taxes. These losses can even offset income at the higher tax rates in place before 2018. Consider opportunities to accelerate deductions into a loss year to benefit from this rate arbitrage and obtain a larger refund. Accounting method changes are among the most powerful ways to accelerate deductions, but remember any nonautomatic changes you want to make effective for the 2020 calendar year must be made by the end of the year. C corporations make NOL refund claims themselves, but pass-through businesses like partnerships and S corporations pass losses onto to owners, who will make claims. The fastest way to obtain a refund is generally by filing a tentative refund claim, but these must be filed by Dec. 31, 2020 for the 2019 calendar year. If your losses will be in 2020, start preparing to file early because you cannot claim an NOL carryback refund until you file your tax return for the year.

Retroactive refund for bonus depreciation. The CARES Act fixed a technical problem with bonus depreciation, a generous provision that allows companies to immediately deduct the full cost of many types of business investments. The legislation expands bonus depreciation to apply to a generous category of qualified improvement property (QIP). QIP is commonly thought of as a retail and restaurant issue, but it is much broader and applies to almost any improvement to the interior of a building that is either owned or leased. The fix is retroactive, so you can fully deduct qualified improvements dating back to Jan. 1, 2018, which may offer relatively quick refunds. Taxpayers who filed 2018 and 2019 returns before the law changed can choose whether to reflect the additional retroactive deduction entirely in the 2020 year with an accounting method change, or amend both the 2018 and 2019 returns to apply bonus depreciation for QIP in each of those years.

Claim quick disaster loss refunds. Tax rules allow businesses to claim certain losses attributable to a disaster on a prior year tax return. This is meant to provide quicker refunds. President Donald Trump’s COVID-19 disaster declaration was unprecedented in scope, designating all 50 states, the District of Columbia and five territories as disaster areas. This means essentially every U.S. business is in the covered disaster area and may be eligible for refunds from certain types of losses. Under this provision, a business could claim a COVID-19 related disaster loss occurring in 2020 on a 2019 amended return for a quicker refund. The provision may potentially affect losses arising in a variety of circumstances, including the loss of inventory or supplies or the closure of offices, stores or plants. To qualify, the loss must actually be attributable to or caused by COVID-19 and satisfy several other requirements.

Consider the timing of payroll tax deduction. The CARES Act allows employers to defer paying their 6.2% share of Social Security taxes for the rest of 2020. Half of the deferred amount is due by Dec. 31, 2021, with the other half due by Dec. 31, 2022. This provides a great liquidity benefit, but taxpayers should consider the impact on deductions before the end of the year. Businesses generally cannot deduct their share of payroll taxes until paid. For most businesses, the value of deferring the actual payment is worth also deferring the deduction, but there may be some benefits for paying early to take the deduction in 2020, such as increasing an NOL for the rate arbitrage benefits discussed above. Some taxpayers using specific methods of accounting may also be able to pay the taxes as late as 8½ months into 2021 and still claim the deduction for 2020.”

Other strategies, particularly relating to small businesses, suggested by Barbara Weltman, author of “J.K. Lasser’s Small Business Taxes 2021,” include considering the potential for next year’s tax bracket to be higher and saving deductions to prepare, according to Accounting Today. Additionally, relief could be found in taking advantage of expiring provisions, including the Work Opportunity Tax Credit (WOTC) for businesses that are rehiring by pulling candidates from those targeted groups that will deliver the tax credit2.

With so many varying circumstances and considerations that boil down to the individual level, the MICPA recommends making your clients a priority in the coming weeks. Taking time to sit down and discuss situational needs and circumstance is the best strategy for determining an effective tax plan. As new developments are still a potentiality, the MICPA will continue to keep members informed of any issues that may arise before the end of the year.

Why tackle year-end planning alone? Bring your questions and join the discussion in the new Tax Season Updates Group on the MICPA Connect platform as peers and experts weigh in on the topic of tax either from a client or company perspective. Simply click here and opt to join the group, post a question, an article or your thought.

  1. 2020 Year-End Tax Planning Tips for Businesses and Individuals.” CPA Practice Advisor. 9 Oct. 2020. Accessed on 19 Nov. 2020.
  2. Russell, Roger. “New Twists in Year-End Tax Planning.” Accounting Today. 27 Oct. 2020. Accessed on 19 Nov. 2020.

Source: MICPA

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