Get started with reducing your 2020 tax bill now

Given that the Biden administration could implement tax reform and that there is still a possibility of additional COVID-19 legislation, taxpayers may want to consider the following before the end of 2020:

Take advantage of provisions in the Cares Act by building up and expanding losses.

Taxpayers can apply losses incurred in 2018, 2019 and 2020 to other years over the past five in which profits were logged. This will allow offsets that can diminish tax payments through re-filings. Taxpayers also ought to keep in mind that the cap on an individuals’ businesses-loss deductions for 2020 has been eliminated.

Tax rates for Income and Capital Gains under the Biden administration could go up.

Taxpayers planning assets sales should complete the sales by the end of 2020 in order to avoid higher tax rates.

Pass on estates to heirs now?

The Biden administration has proposed the idea of reducing the amount an individual can transfer free of estate and gift taxes to $3.5 million in bequeaths at death and $1 million in lifetime gifts. Currently, an individual taxpayer can transfer up to $11.58 million in assets without being subject to gift and estate taxes.

Consider converting traditional individual retirement accounts to Roth IRAs.

Since there is a possibility of higher tax rates going forward under the Biden administration, Taxpayers may want to consider a Roth IRA conversion in order to achieve tax free appreciation in years ahead.

The standard deduction continues to be generous option for most taxpayers.

If a taxpayer’s total annual itemizable deductions for 2020 are close to the standard deduction amount, a taxpayer may want to consider making additional expenditures before 2020-year end that could exceed the standard deduction. For 2020, the standard deduction amounts are $12,400 for singles and those who use married filing separate status, $24,800 for married joint filing couples, and $18,650 for heads of household.

Do not forget the $300 charity write-off.

Taxpayers can write off up to $300 of donations even if they do not itemize for 2020.

Small business (SBs) can also implement strategies now.

• Net operating losses

The CARES Act temporarily relaxed many of the NOL limitations that were implemented under the Tax Cuts and Jobs Act (TCJA). If a SB expects a loss in 2020, it will be able to carry back 100% of that loss to the prior five tax years. If a SB had an NOL carried into 2020, a SB can claim a deduction equal to 100% of a SB’s 2020 taxable income.

• Establish a tax-advantage retirement plan

Now may be the right time to establish a tax-advantaged retirement Plan if a SB does not already have a retirement plan. Current retirement plan rules allow for significant deductible contributions. For example, if you are self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $57,000 for 2020. If you are employed by your own corporation, up to 25% of your salary can be contributed with a maximum contribution of $57,000.

Other small business retirement plan options include the 401(k) plan (which can be set up for just one person), the defined benefit pension plan, and the SIMPLE-IRA. Depending on your circumstances, these other types of plans may allow bigger deductible contributions.

The SECURE Act offers an additional incentive for establishing a retirement plan in 2020. The credit for employers that adopt a new eligible plan is increased from $500 to a maximum of $5,000, and a $500 credit has been added for new SB employer plans with an auto-enrollment feature.

• Generous depreciation tax breaks

One hundred percent first-year bonus depreciation is available for qualified new and used property that is acquired and placed in service in calendar-year 2020. Meaning, a SB may be able to write off the entire cost of some or all of its 2020 asset additions on this year’s return. So, consider making additional acquisitions between now and year-end.

• Generous Section 179 deduction rules

For qualifying property placed in service in tax years beginning in 2020, the maximum Section 179 deduction is $1.04 million. The Section 179 deduction phase-out threshold amount is $2.59 million.

• Time business income and deductions for tax savings

If you conduct your business using a pass-through entity (sole proprietorship, S corporation, LLC, or partnership), your shares of the business’s income and deductions are passed through to you and taxed at your personal rates. If you assume next year’s individual federal income tax rate brackets will be roughly the same as this year’s, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2020 until 2021.

If 2020 was a comparatively bad year due to COVID-19, accelerate income into this year and postpone deductible expenditures until 2021. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate.

• Watch out for business interest expense limit

The CARES Act temporarily relaxed the unfavorable TCJA limitation on a taxpayer’s deduction for business interest expense. Under the TCJA, the deduction was limited to the sum of (1) business interest income, (2) 30% of adjusted taxable income, and (3) floor plan financing interest paid by certain vehicle dealers. For 2020, the 30% limit has been increased to 50% of adjusted taxable income. Barring additional legislation, the limit will go back to 30% in 2021. The rules for businesses conducted as partnerships, LLCs treated as partnerships for tax purposes, and S corporations are especially complicated.

Under the SB exception, a taxpayer is generally exempt from the limit if average annual gross receipts are $26 million (the inflation-adjusted amount for 2020) or less for the three-tax-year period ending with the preceding tax year.

The CARES Act also allows businesses to elect to use their 2019 adjusted taxable income in calculating their 2020 limitation. If average annual receipts are typically over the applicable threshold ($26 million for 2020), but not by much, some judicious year-end tax planning may allow your business to qualify for the small business exception for at least some years.

Do not wait until the last minute in 2020 to implement your tax strategy.

Consult with your specialized tax adviser now for best tax results.

Stanley Foodman is president and CEO of Foodman CPAs & Advisors in Miami.