Among COVID, year-end tax planning is a little different than it has been in quite sometime. And, as we all know, this year with the CARES Act and everything else, things in the tax planning world are different.
Here are a few tips concerning your business and individual clients to help you get through your year-end tax planning.
Businesses
With the CARES Act you may be able to carry forward or carry back any net operating losses (NOL). It is important to point out that C-Corporations are excluded from the NOL carry forward of 100 percent and the carry back amount.
Some clients may be still receiving Paycheck Protection Program (PPP) loan and may have to pay these loans back. Contact any client that may be experiencing these things and plan accordingly. Note as of December 31, 2020 these provisions end. However the Congress is working on a CARES Act II, so stay tuned.
If your client is on the accrual method of accounting, remember the timing of income and expenses is important. For example, if a contract is signed in December however no services are due until January, any income is not taxable in the year received it is only taxable when the contract is fulfilled.
If at all possible the fulfillment of the contract should be pushed to the next year. With expenses any expense incurred in the year or the next three months of the year can be accrued in December.
If on the cash method of accounting December is the right time for vacation. Some clients may receive checks and close their business for the last two weeks of the year.
Under the cash method of accounting income is counted when it is constructively received. If the business closes ask your client to put their mail on hold so if a check is to be received they don’t constructively receive it until January, ergo no income in 2020. With expenses, have the client buy any supplies like office supplies and any big ticket items so they can enjoy either a Section 179 expense or bonus depreciation.
Every business has been affected in some way by COVID. Remember that there are several provisions in the CARES Act designed to help stimulate the economy, through tax credits and other things.
Individuals
Designed in the CARES Act there are many provisions designed to help individuals. One of them we had touched on earlier would be for the owners of a pass-thru company that incurred a NOL. As stated earlier these individuals may be able to carry these losses back or forward 100 percent.
Individuals may be able to deduct up to $300 in charitable giving above the line. This provision phases out depending on adjusted gross income (AGI).
The economic stimulus payments received are not taxable. All unemployment received, even the additional $600 that was available for four months, is taxable as well. Unless there is a NOL from a pass-thru to wipe out that income most people will be required to pay tax on ALL unemployment received.
The timeline of income should not be discounted with year-end bonuses. If at all possible you may be able to check with your employer and get the bonus paid in January.
With NOLs being high in 2020, it may be time to start converting traditional IRAs to Roth IRAs. There would be a tax due, however you would convert these amounts up to the NOL. Remember, if any monies were taken from an IRA, there is no penalty for any COVID-related issues.
It might be time to discuss with your clients a health savings account (HSA). If you have a high deductible plan you can put away $3,550 if you are single and $7,100 if you are a family.
These amounts are above the line deductions, are not taxable when distributed as long as the amounts are used for healthcare, further the amount does not need to be used by year-end so the amounts in that account can accumulate.
Families First Coronavirus Response Act
A critical part of the of the COVID-19 mitigation efforts are to have workers stay at home when sick. As part of the Families First Coronavirus Response Act (FFCRA or Act), certain workers, including those self-employed individuals, are provided by their employers with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19.
To help businesses pay for this, Congress is providing tax credits, but in order to receive these credits their employees must be:
• Subject to a federal, state or local coronavirus quarantine or isolation order
• Advised by a health care provider to self-quarantine due to coronavirus concerns
• Experiencing coronavirus symptoms and seeking a medical diagnosis
• Caring for someone else who is subject to a coronavirus-related federal, state or local quarantine or isolation order, or who has been advised by a health care provider to self-quarantine due to coronavirus-related concerns
• Caring for a son or daughter if the child's school or daycare has been closed, or the child's care provider is unavailable, due to coronavirus precautions
• Experiencing any other substantially similar condition specified by the Secretary of Health and Human Services.
According to the Act workers receive two-thirds of their regular salary while on coronavirus-related FMLA leave, but compensation is capped at $200 per day and $10,000 in total. However, this leave does not kick in until after 10 days.
For the new sick leave benefits, the credit is limited to $511 per day for workers taking leave because they are sick or quarantined. The limit is $200 per day for workers taking leave to care for another person or on leave because of an HHS-specified condition. The credit is further reduced by a 10-sick-days-per-worker limit.
The sick leave credit is based on a self-employed person's "qualified sick leave equivalent amount." That amount is equal to (1) up to 10 days during the year that the person can't work for a reason that would entitle them to coronavirus-related sick leave if he or she were an employee, (2) multiplied by the lesser of:
• $511 per day for people who are sick or quarantined, or $200 per day for people caring for another person or on leave because of an HHS-specified condition; or
• 100 percent of a sick or quarantined person's average daily self-employment income for the year, or 67 percent of the average daily self-employment income for a person caring for another person or on leave because of an HHS-specified condition.
A self-employment tax credit is also available for 100 percent of a person's "qualified family leave equivalent amount." That amount is equal to (1) up to 50 days during the year that the person can't work for a reason that would entitle them to coronavirus-related family leave if he or she were an employee, (2) multiplied by the lesser of:
• $200 or
• 67 percent of the person's average daily self-employment income for the year.
As you can see this is a huge saving for businesses and the self-employed. These are just a few things you can do to mitigate a client’s tax liability this year.