Tax considerations as 2020 winds down
By Paul Impellicceiri, CPA, Partner
A.F. McGervey & Co., LLC
The current year has been unlike any other! The election, the pandemic and the general unrest in the country have contributed to the anxiety of individuals and business owners alike. And while the underlying tax legislation has not changed significantly for 2020, there have been provisions added, related to the ongoing pandemic, due dates, extensions, and stimulus payments. To begin, this guidance for Business owners.
- Key points related to the Payroll Protection Program
- If the funds are used for specified expenses under the program, the loan balance can potentially be forgiven. However, unless Congress changes the tax law, the expenses paid with the proceeds of the loan currently are not deductible.
- If the legislature does not act prior to the due date of an entity’s tax returns or financial reporting, owners may need to make a decision on how to treat the proceeds. They will either report a loan, or request forgiveness, and potentially incur a tax liability related to the funds received. (At this point it is not clear if clarification will be issued in a timely manner.)
- Businesses have until December 31, 2020 to make a good faith effort and rehire or fill positions to re-establish their pre-pandemic workforce levels to avoid reductions in loan forgiveness.
- Borrowers have 10 months - from the end of their covered period - to request loan forgiveness, before loan payments may begin.
- As part of the response to the ongoing pandemic, the legislature has issued provisions that affect both employers and employees. Employers are required to compensate employees for absences related to Covid-19 for either illness or taking care of a family member affected. Tax credits have been made available in an effort to mitigate the costs of this compensation. In addition, employers have the opportunity to defer their share of payroll taxes into the future. And unemployment benefits have been expanded for employees and business owners as well.
- With the potential change in administration, business owners will again have to consider possible increases in tax rates, moving forward. It appears the new administration would like to increase the corporate tax rates, as well as the top individual tax rates. Accordingly, companies will need to review their operating and compensation structures. Accelerating income or compensation into 2020 and deferring expenses may make sense if, as expected, tax rates increase in 2021.
This guidance for Individual taxpayers
- Regarding the Cares Act stimulus checks: There are income limitations which phase out eligibility for married couples filing jointly starting at $150,000, and single taxpayers at $75,000. Most eligible taxpayers have received their checks. However, it is possible that some people will still qualify for a credit on their 2020 tax return.
- Tax brackets and standard deductions have been indexed for inflation, however there were no major legislative changes made to the reporting of income and deductions.
- Taxpayers may want to consider accelerating income into 2020 - in particular capital gains - as the new administration has indicated they would like to increase the favorable tax rates on these transactions for higher income taxpayers.
- The 10 percent penalty on early IRA distributions has been waived for COVID-19 related distributions taken in 2020 of up to $100,000. The distribution can be included in income, over a 3-year period, and individuals may return the money within a 3-year period to avoid taxation.
Significant changes relating to Retirement Plans
- Mandatory minimum distributions are no longer required until age 72, up from age
70½. This change only applies to account owners who turn 70½ after 2019.
- Required minimum distributions are suspended for 2020, including inherited IRA’s.
- Individuals can continue to make contributions to a traditional IRA past the age of 70½.
- Inherited IRA's must be completely distributed within 10 years. They can no longer be paid out of over the life of a non-spouse beneficiary.
Paul Impellicceiri is a partner at Pittsburgh-based accounting/auditing firm, A. F. McGervey & Company, LLC, and can be reached for comment at firstname.lastname@example.org or (412) 653-6101.