New Tax Strategies During the Coronavirus Pandemic

The tax season is here! The deadline was extended from April 15 to July 15.

We cannot understate both human and economic damages COVID-19 has caused across the country. Individuals and businesses are feeling the impact of the crisis, significant revenue reduction, staff dismissals, and some closing branches. States also face reduced tax revenue due to low income and sales taxes, they may cascade this down by raising their taxes; it is an unprecedented tax season for everyone.

The depressed asset values as well as government legislative changes offer planning opportunities to reduce personal and business tax bills for the far-sighted taxpayers. However, most of these government coronavirus-related provisions are temporary, only one year. A good example is the business interest expense limitation increase provided by the changes to Code Section 163(j). The limit has been increased from 30% to 50% but can only be applied to a tax year beginning 2019 or 2020.

Tax Planning Opportunities

Here are tax strategies businesses and individuals can use to reduce effects of COVID-19 pandemic taking advantage of government provisions:

1. Employee Tax Credit and Deferral on the Payroll Taxes

Employers who were subject to a closure related to COVID-19 can take a credit against paid employment taxes up to the set limit of $10,000 for each employee. Small businesses with less than 100 employees can take credit for all the employees, large companies with over 100 employees only take credit for those employees not working but paid.

Employee retention credit or the Social Security tax deferral allows an employer to delay payments to 2021 and 2022 when the business will be back on its knees.  

Note that these payroll tax credits/deferrals are not available for recipients of PPP loans.

2. Removed Cap on Excess Business Losses

Before COVID-19, the limit was at 500,000 for married filing joint return ($250,000 for single filers).  This year, any business loss can be reported which can significantly reduce the tax bill.

3. Previous Net Operating Losses

Businesses can now revisit losses filed even five years ago. The CARES Act loosened rules governing net operating loss deductions (NOLs). The Act allows for a five-year carryback for losses earned in 2018, 2019, or 2020, which allows taxpayers to modify tax returns up to five years prior to offset taxable income from those tax years. Considering how high the tax rate was before the 2017 tax changes, if losses made then are worth more today, you could get a refund now.

4. Personal Planning Opportunities

The CARES Act allows eligible participants in certain tax-advantaged retirement plans to take an early distribution of up to $100,000 in 2020 and forego the 10% penalty tax before the account owner hits 59 ½. The mandatory 20% tax withholding requirement that applies to early distributions from a 401(k) has been suspended.

Another way is to convert a traditional retirement account to a Roth IRA. With the traditional retirement plan, contributions are tax free but benefits are taxed when they mature, Roth IRA taxes the contributions but has tax free benefits. An individual, therefore, pays the tax now, taking advantage of the temporary provisions.  

If you are 70 ½ or older, you do not have to take your required minimum distribution (“RMD”) for 2020 from your retirement account.  If you do not need the money, consider calling your advisor and telling him or her that you want to waive this for tax year 2020.  This move will decrease your taxable income for 2020 and your tax liability.

5. Estate Planning

Coronavirus fear has forced several clients to change their wills and health care proxies. The tax consequences of these moves can be favorable during this time of depressed values, low-interest rates, and volatility.  The lower values mean business owners can transfer larger percentage ownership interests within annual and lifetime exclusion amounts and incur potentially lower tax obligations on transfers of any given ownership interests whose value is beyond those limits.  

With historically low interest rates, certain estate planning techniques are particularly effective, including grantor-retained annuity trusts, sales to grantor trusts, charitable lead annuity trusts, and intra-family loans.