Tax law has been changing. Four pieces of legislation, with tax provisions, have been enacted in less than three years. At the end of 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law. It was the first major tax reform in 31 years and included a reduction in tax rates, a new QBI deduction against business income, an increase in depreciation, and a doubling of the §179 expensing amount.
The Appropriations Act, which included tax extenders, retirement and IRA reforms, was signed into law at the end of 2019. And then COVID-19 hit. Congress began work sending bipartisan stimulus legislation to the President for his signature, including the CARES Act, signed into law at the end of March 2020.
A few highlights of the many changes that apply to businesses follow:
First, the changes related to COVID-19:
- Sick Pay and Family Leave. The Families First Coronavirus Response Act (FFCRA) requires certain employers to provide employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. The government reimburses th employer for the cost of the leave through a temporary payroll tax credit. Read more about this at the IRS Coronavirus Tax Relief page, including its FAQs.
- Employee Retention Credit. CARES allows eligible employers to receive a 50% payroll tax credit up to $5,000 ($10,000 x 50%) per employee for qualified wages paid after Mar. 12, 2020, and before Jan. 1, 2021. If the credit amount exceeds the employer’s withholding tax liability, the
excess is refundable. Read more about this provision at the IRS FAQs on the Employee Retention Credit.
- Employer Payroll Tax Delay. Employers must withhold Social Security taxes on employee wages. Self-employed individuals are subject to self-employment tax. Under CARES, taxpayers are allowed to defer paying the 6.2% employer share of the Social Security tax (but not the 1.45% employer share of the Medicare tax) through the end of 2020. The tax would be payable over the following two years with half paid by Dec. 31, 2021, and the other half by Dec. 31, 2022. Read more about this provision at the IRS FAQs on the Deferral of Payroll Tax Deposits.
- SBA Paycheck Protection Program Loan. A stimulus provision in the CARES Act made available SBA loans for cash-strapped businesses suffering from the nationwide economic impact of COVID-19. The Paycheck Protection Program (PPP) loan was meant to help businesses
continue paying their employees during the pandemic. The PPP loan may be forgiven if the loan proceeds were spent on payroll costs and certain other qualifying business expenses. A forgiveness application (SBA Form 3508 or Form 3508EZ) must be timely submitted to the lender. Read more about the PPP loan at a special SBA website page. Please call us if you need help with the forgiveness application.
- Interest deductions. For businesses with gross receipts in excess of $26 million, CARES caps the deduction for net business interest expenses at 50% of adjusted taxable income (was 30%). This is a retroactive change from prior law and may require an amended return.
- Net operating losses. Get tax refunds now. CARES provides that net operating losses (NOLs) arising in a tax year beginning after Dec. 31, 2017, and before Jan. 1, 2021, can be carried back to the five tax years preceding the tax year of such loss. In short, NOLs arising in 2018, 2019, and 2020 can be carried back to the five preceding years and can fully offset taxable income. This is a retroactive change from prior law and may require an amended return.
- Corporate taxes. C corporation tax rate was reduced to 21%, from a top rate of 35%. Corporate alternative minimum tax was repealed.
- The bonus depreciation allowance is 100% for qualifying property placed in service after Sep. 27, 2017, and before Jan. 1, 2023. A phase-out of the deduction begins Jan. 1, 2023. The requirement that the original use of qualified property must begin with the taxpayer has been removed. Thus, bonus depreciation is allowed on the purchase of new or used property.
- Qualified Improvement Property. A technical error in the TCJA was retroactively corrected in the CARES Act. Effective for qualified leasehold improvement property, qualified restaurant improvement
property, and qualified retail improvement property (collectively called QIP) placed in service in 2018 and later is15-year cost recovery property for depreciation purposes, making it eligible for bonus depreciation. An amended return may be needed to take advantage of this change.
- Section 179 expensing. The §179 expensing amount is $1.04 million, and the investment limitation is $2.59 million. Some property, such as a roof on a nonresidential property, can qualify for a §179 expensing
- QBI Deduction for pass-through businesses. Noncorporate taxpayers may deduct up to 20% of domestic qualified business income from an S corporation, partnership, LLC, sole proprietorship, or farm. In some
situations, net rental income can qualify for some or all of the 20% deduction. Limitations apply based on wages paid or if the qualified business income is from a specified service business (like law, accounting, medical, etc.). Neither limitation applies if the taxpayer’s 2020 taxable income on his or her Form 1040 is less than $163,300 for a single person ($326,600 for a married filing joint couple).
- Tax-deferred exchanges. The tax-deferred exchange rules in §1031 apply only to real property. Personal property, such as autos machines, tractors, equipment, etc., may no longer qualify under the tax-deferred exchange rules.
- Deductions and credits. The entertainment deduction has been repealed. The cost of tickets to concerts, football games, or the ballet is no longer deductible.
- Stock options. A new Section 83(i) provision allows qualified employees of private companies to defer tax on the exercise of options for up to five years. CEOs, CFOs, highly compensated employees, and 1% owners are not eligible for the deferral.
These are just a few of the changes included in the recent tax legislation. Your 2020 business taxes will be affected. That’s guaranteed by the scope of the changes. In addition, no matter the results of the election, more changes are coming.