Episode 4:  Louisville CPA Steve King discusses end of the year tax moves you may want to consider.  This was a challenging year both for individuals and businesses.  Today’s conversation is going to cover issues for both, so let’s jump in.

The PPP program injected a tremendous amount of money into the economy.  There are ongoing discussions in Washington DC about additional stimulus, but let’s deal with what we already know (or don’t).

If you used PPP proceeds to pay for specified business expenses, you may not be able to also use those expenses as deductions.  This could change, but for now the expenses you covered with the PPP money aren’t deductible. 

The $1,200 stimulus checks ($2,400 for married couples) were dispersed, but some people may not have received them.  The funds may be accounted for when you file your taxes.  Based on your 2020 income, if you received funds but shouldn’t have, it looks as if you will not have to pay back the $1,200.

1099 NEC Form

There’s been a change for 1099 reporting.  Businesses would normally check Box 7 for independent contractors or subcontractors.  However, there have been multiple deadlines for Box 7 and the other options on the form.  There's a new form 1099 NEC which will eliminate the confusion over multiple deadlines.  The 1099 NEC will basically take the place of Box 7.

Donations

The standard deduction has been raised to approximately $24,000 (married filing jointly).  However, this doesn’t mean they’ve eliminated the charitable giving deduction.  If you itemized total is less than $24,000 you’ll simple take the standard deduction in lieu of your itemized deductions.  If your itemized deductions exceed $24,000, then use the itemized deductions. 

The CARES Act added a $300 deduction, over the $24,000 standard deduction. 

Interestingly, in previous years there has been a 60% of your income limit on your charitable deductions.  For 2020, that limit has been removed. 

Net Operating Losses (NOLs)

If you’ve had a net operating loss at the bottom of your 1040, your taxes would be zero.  There’s a new carry-back rule, as part of the CARES Act.  You can go back 5 years, an apply those losses to previous years.  This may result in a refund from prior years, which could quickly put money back into your operations.  It may be more beneficial than carrying the loss forward as future offsets.  You’ll use Form 1045. 

Qualified Improvements

The 2017 Tax Cuts and Jobs Act (TCJA) had an oversight that’s now been corrected.  The way the Act was written treated qualified improvements in a way that required you to spread the depreciation over 39 years.  The error meant you couldn’t depreciate it over 15 years, or use the bonus depreciation option of taking it all in 1 year.  This glitch has been fixed.  You can now amend your previous returns. 

NOTE:  If you amend previous returns and it creates an NOL (see above), you may be able to recoup dollars you’ve already paid in previous years. 

Required Minimum Distributions (RMDs)

At age 72, you’re required to begin taking minimum distributions.  This has been suspended for 2020, so you can leave the money in place if you prefer.

Early IRA Distributions

If you make early distribution from your IRA, you would typically be subjected to taxes and a 10% penalty.  In a move to help people who need to access these funds, Congress opened the door.  You’ll need to make a case that you’ve been adversely impacted by COVID.  There are 2 forms of relief.  First, you’ll be able to that distribution without incurring the 10% penalty. 

The second form of relief is that you have 3 years to pay the taxes you incurred.  Related to this is the option to pay back the funds you withdrew within 3 years and you won’t have to pay taxes.  It’s important that you have solid documentation of the transactions to avoid problems.  The IRS may ask for the backup, so have your paperwork in order and make sure you haven’t missed your deadlines.

Kiddie Tax Rule

In the 2017 Tax Cuts and Jobs Act, unearned income for minors was negatively impacted.  It eliminated the Kiddie Tax Rule and taxed that unearned income at Trust rates.  This was unfair and has now been addressed.  As of now, the option of using the Kiddie Tax Rule (taxing the unearned income at the parent’s rate vs. the Trust rate), is back.  This applies mainly to dividends, capital gains and interest, not regular income.

General End of Year Planning

Opportunity Zones were part of the 2017 Tax Cuts and Jobs Act.  If you had a capital gain, you were given the option to invest some of that gain into an Opportunity Zone, as defined by the government and receive a tax benefit for doing it.  A 180-day window was established during which you were supposed to have invested the gains. 

If you sold an asset in 2020, you have to reinvest in an Opportunity Zone within 180 days or by 12/31/20, whichever is later.

Extenders

Congress often passes laws including sunset provisions.  These have to be renewed if they are to continue.  We refer to these as “extenders.”  Let’s discuss a few that are in-play.

Debt Forgiveness on a Principal Home

If you are unable to pay your mortgage and the back forgives a portion of the loan, that portion is considered income.  If you do this by the end of 2020, it will not be considered income.  Congress may extend it for 2021, but we don’t know if they will

PMI

This is another extender expiring.  For 2020, you get to deduct your PMI on a home loan.  This may not be a big deal, if you’re not going to itemized. 

Tuition and Fees Deduction

This deduction also may expire.  If you have a child in college and you don’t have a 529 plan.  If you think you aren’t going to qualify for the credit, you may want to make a tuition payment by 12/31/20 to enable you to take the deduction.

Energy Credits

There’s a small, lifetime $500 credit for installing Energy Star appliances.  If you haven’t already taken the credit, you may be able to purchase a qualifying appliance by 12/31/20 to take advantage of the credit. 

Final Thoughts for 2020

As the year comes to the end, you may want to defer income and speed up deductions, where it makes sense.  Again, do it where it makes sense.  The big unknown comes back to the PPP.  It’s difficult to know your income because of the issue related to the other expenses covered by the PPP proceeds. 

It may also be time to begin harvesting to reduce your net capital gains on investments.  The stock market has recovered.  If you incurred gains in 2020, you might consider trimming your portfolio by tax-loss harvesting.  This can offset some of your capital gains.  Note:  You need to be mindful of the Wash-Sale Rule.

The Wash-Sale Rule basically prohibits you from selling a stock and then buying it back within 30 days and still take the loss for tax purposes.  You’ll need to buy it back on the 31st day or later.

Thank you for taking the time to listen to this episode.  For more information, contact Steve King, Partner at MK CPAs and Advisors, at 502-587-9833.  They’re here to help you to Make the Numbers Work.