Recent Tax Law Changes, Part Two
This article will cover the other recent tax law changes covering the following:
Extended due dates for filing returns and payment requirements
Net operating losses limitation and carryback rules
AMT credits in 2019
Limitation on the deductibility of interest expense
Property depreciation and related deduction elections
Charitable contributions during 2020
Kiddie tax calculation
10% early withdrawal penalty waiver on qualified retirement accounts distributions
Paycheck Protection Program (PPP) Loans and related non-deductible expenses
At the time of writing this article the Internal Revenue Service has issued and continues to issue guidance for complying with these law changes. The following is quick overview, as of the writing of this article.
Extended due dates for filing returns and payment requirements
In April, the IRS issued two notices that extended due dates until July 15, 2020, for tax returns and making required tax payments in light of the COVID-19 pandemic. The extensions are automatic (nothing needs to be filed). All payments that have been extended until July 15 are due on that date. That includes any 2019 payments, the first two 2020 estimated income tax payments and any other extended payments. In addition to the automatic extension for taxpayers to file these returns and pay applicable taxes the CARES Act also extends to July 15, 2020, the time to take specified time-sensitive actions that would have occurred between April 1, 2020 and July 14, 2020. This allows for some quick potential tax planning but the due date of any actions is July 15, 2020. A taxpayer may still file for additional extensions of time to file tax returns beyond July 15, 2020 until the normal maximum extended due dates allowed for the return (e.g., to October 15, 2020 for an individual income tax return). However, tax payments and specified time-sensitive actions cannot be extended unless they are normally covered by the additional extended due date of the applicable tax return.
Net operating losses limitation and carryback rules
Net operating losses generated from 2018 through 2020 can offset 100% of taxable income rather than 80% and can be carried back five years. This is an opportunity to amend 2018 and 2019 returns to potentially get refunds. There are also tax-planning opportunities in regard to the 2020 tax year. In addition, excess business loss limitation has been repealed for years beginning before Jan. 1, 2021. If during the 2018 or 2019 tax years individuals had more than $250,000 single or $500,000 married filing joint in business losses, they should review their tax situation and possibly amend returns. The IRS has provided guidance, in a Revenue Procedure, to taxpayers with net operating losses (NOLs) arising in tax years beginning in 2018, 2019, or 2020 on how to
Waive the 5-year carryback period,
Elect to exclude Code Sec. 965 years from the carryback period, and
Apply to waive a carryback period, reduce a carryback period or revoke an election to waive a carryback period for a tax year that began before Jan. 1, 2018 and ended after Dec. 31, 2017.
AMT credits in 2019
When amending tax returns be aware of the possible alternative minimum tax (AMT) ramifications. Note to Individuals, Estates, and Trusts, if you paid AMT for 2018 or you had a minimum tax credit carryforward on your 2018 Form 8801and if you pay AMT for 2019, you may be able to take a credit.
Limitation on the deductibility of interest expense
The CARES Act retroactively increases the amount of business interest expense that may be deductible for tax years beginning in 2019 and 2020 by computing the Code Sec. 163(j) limitation using 50%, rather than 30%, of the taxpayer’s adjusted taxable income (ATI). IRS provides guidance for electing or amending an election to be “an electing real property or farming business” in Revenue Procedure 2020-22, 2020-18 IRB 2020-23 as the result of the law change.
Property depreciation and related deduction elections
The CARES Act. made a change in the recovery period of qualified improvement property (“QIP”) that could provide a significant tax benefit for certain taxpayers. Since the change was retroactive to January 1, 2018, the opportunity to amend returns should be reviewed. Now that QIP has a recovery period of 15 years, and is therefore eligible for bonus depreciation, certain elections taxpayers may have made for 2018 and/or 2019 may cause unintended consequences. Revenue Procedure 2020-25 provides guidance for filing the amended returns. The following elections are addressed in the Revenue Procedure for which a taxpayer may make late elections as well as revoke/withdraw previously made elections.
IRC Sec. 168(g)(7) allows a taxpayer to make an election to depreciate under the alternative depreciation system (“ADS”) any class of property placed in service by the taxpayer during the taxable year.
IRC Sec. 168(k)(5) allows a taxpayer to make an election to apply special additional depreciation rules to one or more specified plants that are planted, or grafted to a plant that has already been planted, by the taxpayer in the ordinary course of its farming business.
IRC Sec. 168(k)(7) allows a taxpayer to make an election not to deduct bonus depreciation for any class of property that is qualified property placed in service during the taxable year.
IRC Sec. 168(k)(10) allows a taxpayer to make an election to deduct 50%, instead of 100%, bonus depreciation for: (a) all qualified property acquired by the taxpayer after September 27, 2017 and placed in service by the taxpayer during its taxable year that includes September 28, 2017; and (b) all specified plants that are planted, or grafted to a plant that has already been planted, after September 27,
2017, by the taxpayer in the ordinary course of the taxpayer’s farming business during its taxable year that includes September 28, 2017, if the taxpayer makes the IRC Sec. 168(k)(5) election for that taxable year.
It should be noted that this Revenue Procedure is not applicable to QIP placed in service by a taxpayer that made a late election, or withdrew an election made in accordance with the aforementioned Rev. Proc. 2020-22.
Charitable contributions during 2020
Cash charitable contributions made by corporations are now deductible at 25% rather than 10%, for individuals 100% of cash contributions can be deducted against gross income.
Kiddie tax calculation
On Dec. 20, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act, (Secure Act). The Secure Act favorably changed the Kiddie Tax rates effective for 2020 and beyond, however you can choose to apply the tax-saving change to 2018 and/or 2019 returns. So, if you have a Kiddie Tax filer in the family, an amended 2018 return may be in order.
10% early withdrawal penalty waiver on qualified retirement accounts distributions
For 2020, the 10% early withdrawal penalty has been waived for coronavirus-related distributions up to $100,000 from qualified retirement accounts. The distributions will be reported ratably as ordinary income over three years starting in 2020 (unless the taxpayer elects to treat the entire amount as income in 2020). You may recontribute funds to any eligible retirement plan within three years to avoid tax altogether. The Required Minimum Distribution rules for retirement accounts are also suspended for 2020.
Paycheck Protection Program (PPP) Loans and related non-deductible expenses
If you obtained a Paycheck Protection Program (PPP) Loans, be aware that the IRS has stated that the cost related to obtaining the funds are not deductible. Take the time to clearly identify those direct cost as they are incurred.
Summary
To implement changes under the Secure Act and CARES Act, a significant amount of effort will still be required to effectuate the many changes. However, due to the potential tax benefits and cash-flow effects, investing in the analysis and tax reporting process can prove to be beneficial for many taxpayers. The guidance provided by the IRS needs to be followed since not doing so could result in unintended tax consequences in the future. This is a very summarized overview of the government’s actions related to helping businesses during the COVID-19 epidemic. Some law changes require quick action and the rules are complicated. Some opportunities end July 15 and many other actions need to be taken before year end. Review your current year’s facts and prior years to see if your operation may benefit from the recent law changes. Do not delay addressing these opportunities. Your tax adviser should be able to help you navigate these changes in the law so you arrive at the best answer for your operation.