Year-end planning for 2020 takes place against the backdrop of a turbulent year for businesses. The following is a brief overview of many year-end tax saving strategies. Some are straight forward, while others require more analysis and review to tailor them to your particular tax and financial situation.
Take Advantage of Refund Opportunities
Provisions within the Tax Cuts and Jobs Act (TCJA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES) provide opportunities for businesses to increase their cash flows by receiving refunds of prior taxes paid in a variety of ways.
The TCJA repealed the corporate alternative minimum tax and allows corporations to claim their unused AMT credits in tax years beginning in 2018-2021. The CARES Act accelerated this timeline and now allows corporations to claim all remaining credits in 2018 or 2019. There are several options for filling the claim for refund. The fastest way is to file a tentative claim for refund on Form 1139, which must be done by December 31, 2020.
Net Operating Losses
The CARES Act contains a provision enabling businesses to apply current losses against previous income to generate immediate refunds. NOLs generated in 2018, 2019, or 2020 can be carried back up to five years to generate refunds or prior taxes. If you anticipate losses with your 2020 return, start preparing to file early as you cannot claim an NOL carryback until your 2020 return is filed.
Qualified Business Income (QBI) Deduction
The Qualified Business Income Deduction, also known as the Section 199A deduction, allows eligible business owners to claim a tax deduction worth up to:
· 20% of their qualified business income (QBI), plus
· 20% of qualified real estate investment trust (REIT) dividends, and
· 20% of qualified publicly traded partnerships (PTP).
This is one of the new provisions under the NEW Law that is set to expire after 2025.
Qualified Business Income (QBI) is essentially net profits from “any” pass-through trade or business, subject to certain limitations and exclusions:
1) Certain personal service businesses known as “specified Service Trade or Businesses” and
2) The trade or business of performing services “as an employee.”
A “Specified Service Trade or Business” (SSTB) is any trade or business activity where the principle asset of such trade or business is the reputation of skill of one or more of its employees. Certain industries are also automatically classified as an SSTB due to the nature of the services rendered (i.e. law, accounting, performing arts, consulting, etc).
Qualifying owners with the total taxable income under $163,300 or $326,600 (if filling jointly) may qualify for the full 20% deduction. Owners of SSTB’s may qualify for the full 20% deduction if taxable income does not exceed $160,700 or $321,400 (if filling jointly). Above these limits, the ability to claim the deduction depends on the precise nature of the business, as the deduction phases out for some businesses.
For more year-end tax saving strategies, please visit our full white paper here.
To read a continuation of possible strategies for your business, read our 2020 Business Year-End Tax Planning Tips Continued blog post.
Tax planning in 2020 is complex and made even more so with the pandemic. Avoid any surprises next April 15th and be proactive in your tax strategizing. Davis & Hodgdon Associates CPAs has been assisting individuals and businesses throughout Vermont and New England for more than 30 years so please reach out to us in Williston (802.878.1963) or Rutland (802.775.7132) to schedule a strategy session today! You can also email us at [email protected].