Succeeding in Your Business: Year-end tax planning: Getting ready to file your 2020 return

We have reached the end of the annus horribilis that was 2020, and it’s hard to even think of another income tax deadline in three to four months.

But as Mark Twain once observed, the only two things you can count on in life are death and taxes.

The good news: If your small business was clobbered by the COVID-19 pandemic and government shutdowns, you shouldn’t have to pay a lot in taxes for 2020.

The bad news: Sometimes our income tax laws work in crazy ways.

I’m indebted to my good friend John D’Aquila, a Certified Public Accountant and head of D’Aquila and Co. in Jacksonville, Florida, for sharing some of his year-end tax tips with me and allowing me to share them with you.

Effect of CARES Act Rebate on Your 2020 Tax Return. Under the Coronavirus Aid, Relief and Economic Security Act (CARES Act), individuals with income under a certain level were entitled to a recovery rebate tax credit or a stimulus check. Single individuals were entitled to $1,200, and joint filers were entitled to $2,400, plus $500 for each qualifying child. Since the government issued the rebates based on 2019 income tax returns, or 2018 returns for individuals who had not yet filed their 2019 tax return, the calculation for the correct amount of the rebate will be part of your 2020 tax return. If your 2020 tax return indicates a rebate larger than your stimulus check (because, for example, your income went down or you had another child), the excess amount can be claimed as a credit against your 2020 tax bill. On the other hand, if the 2020 rebate calculation shows an amount in excess of what you were entitled to, you do not have to repay that excess.

Business Deductions. As a result of the CARES Act, qualified improvement property such as qualified leasehold improvements, qualified restaurant property and qualified retail improvement property is now depreciated over a 15-year life and eligible for bonus depreciation. This change is retroactive to 2017 and amended returns can be filed to claim refunds for the missed deductions.

PPP and EIDL Loans. Included in the CARES Act was the Paycheck Protection Program (PPP), a program authorized by the Small Business Administration (SBA) to guarantee $349 billion in new loans to eligible businesses and nonprofits affected by COVID-19. Although these loans may qualify for loan forgiveness, the expenses paid for with forgiven funds are NOT deductible. If your business obtained funds through the PPP program, talk to your accountant as soon as possible and discuss the steps and documentation necessary to ensure your loan is fully forgiven.
If your business received a grant as part of an Economic Injury Disaster Loan (EIDL) from the SBA, the portion labeled as a grant is treated as income for federal income tax purposes (state and local tax laws may vary).

Qualified Business Income Deduction. If you are a sole proprietor, a partner in a partnership, a member in a limited liability company taxed as a partnership or a shareholder in an S corporation, you may be eligible for the qualified business income (QBI) deduction, which is generally 20 percent of qualifying business income from a qualified trade or business, with certain limitations. The calculation of the 20 percent deduction is quite tricky, however, and D’Aquila advises you speak to your accountant to determine whether your business qualifies.

Retirement Plans and Other Employee Benefits. Not only are employer contributions made to retirement plans for employees deductible, but businesses may also be eligible for a tax credit for setting up a qualified plan. The credit, which applies for up to three years, was increased this year to the lesser of a flat $500 per year or 50 percent of the qualified startup costs. Since both business owners and their spouses can take advantage of retirement plans, D’Aquila says you should consider adding your spouse as an employee and paying a salary up to the maximum amount that can be deferred into a retirement plan.

To help employees with medical expenses, D’Aquila adds, consider setting up a high-deductible health plan paired with a health savings account (HSA). The business saves on health insurance premiums; employee contributions are not counted as wages, so neither the business nor the employee is subject to Social Security taxes on the contributions; and employees get a tax deduction for the HSA contributions that can grow tax-free and be used in retirement.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act extended through 2020 an employer credit for paid family and medical leave and the work opportunity credit. The paid family and medical leave credit allows eligible employers to claim a credit equal to an applicable percent of wages paid to qualifying employees during any period during which such employees are on family and medical leave, provided that the payment is at least 50 percent of the wages normally paid to the employees. Under the work opportunity credit, an employer can take a 40 percent credit for qualified first-year wages paid to employees who are members of a targeted group of employees.

Impact of Future Tax Legislation. Who knows? With a new president and uncertainty about which party will end up controlling Congress, it is difficult, if not impossible, to predict what will happen in 2021.

President-elect Joe Biden has made it clear he wants to raise corporate taxes, tax capital gains the same as ordinary income and raise individual income tax rates on people earning over $400,000 a year.

If the Senate ends up controlled by Republicans with a 51-49 majority, it is not clear whether any changes in the tax laws will be possible. If the Senate ends up with a 50-50 split between Republicans and Democrats, giving Vice President-elect Kamala Harris (as president pro tempore of the Senate) the deciding vote, then progressive tax initiatives are more likely to be passed, but all it will take is one conservative Democrat “going rogue” to block any tax reform bill. What actually happens in Congress next year will depend on:

• The results of the runoff elections for U.S. Senate in Georgia.

• Each party’s ability to discipline its members.

• The extent to which both parties are willing and able to horse-trade with one another to create a working majority on any particular issue.

As events unfold, this column will try, as always, to stay on top of them.

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”

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