2020 has been a year without precedent in recent memory. Businesses struggling to survive and find some kind of new normal have also had to deal with a host of new legislation, regulations, and programs to access government assistance. Meanwhile, Treasury and the IRS continued releasing guidance intended to implement the sweeping changes made by the 2017 Tax Cuts and Jobs Act (TCJA). As we work our way through the fourth quarter of one of the most turbulent years in recent years, it’s important to review some of the actions businesses can take before the end of the year in order to take full advantage of available opportunities for tax savings and COVID-19 relief.
Take some time to consider these possible actions that, if taken before the end of 2020, could result in an immediate improvement in your tax position.
Asset purchases/Bonus depreciation
The TCJA made some valuable improvements to the bonus depreciation provisions in the Internal Revenue Code (IRC). First, it increased the bonus depreciation percentage to 100% for property that has a useful life shorter than 20 years and is placed in service between Sept. 27, 2017, and Jan. 1, 2023. Second, it extended bonus depreciation treatment to purchases of previously used assets. So, the cost of many depreciable assets purchased in the fourth quarter could be fully recovered when your business files its tax return.
The generous bonus depreciation rules also have the potential to make a cost segregation study even more valuable for businesses that own buildings. Elements of a building that are “dedicated, decorative and removable” may qualify to be depreciated separately from the real estate in which they are located or to which they are attached and, where appropriate, 100% bonus depreciation. Items such as carpets, specialized wiring or cooling systems, and ornamental millwork could help to reduce your 2020 tax liability if you perform a cost segregation study and depreciate them separately. Find a more comprehensive look at how cost segregation affects your tax planning here.
And for those of you struggling to think of one good thing that happened in 2020, remember that Congress included a fix in the Coronavirus Aid, Relief and Economic Security (CARES) Act for a drafting error in the TCJA that caused headaches for many businesses, especially restaurants and retailers. The CARES Act clarified that certain interior improvements to nonresidential real property known as “qualified improvement property” (QIP) have an asset life short enough to qualify for bonus depreciation treatment. Affected taxpayers may even be eligible for refunds on previous returns based on this change.
R&D tax credits
What you don’t know about the R&D tax credit could be costing you money at tax time. Many businesses now develop software that they use to manage internal processes or customer relations. More and more businesses as diverse as software as a service (SaaS) companies, insurance companies, and healthcare providers are doing work that could qualify for the credit. A review of your processes during the fourth quarter could result in a tax credit on this year’s return.
Accounting methods
Few topics glaze over the eyes of nonaccountants faster than a discussion on accounting methods, but it’s important that every businessperson understand how these methods can have a significant impact on cash flow. As you head into the fourth quarter of one of the most challenging years that businesses have faced in decades, It’s a great time to review your existing choices and evaluate if a change is in order. This webinar provides excellent insights on how changes in accounting methods can help your business survive the economic turmoil caused by the pandemic.
IC-DISC
Many U.S.-based businesses that export products have found that an interest-charge domestic international sales corporation (IC-DISC) can help to lower their U.S. income taxes. This type of entity could deliver additional benefits for businesses taking advantage of COVID-19 relief programs such as the Payroll Protection Program and improved access to net operating loss carrybacks. If your business has never considered an IC-DISC before, or if you’ve considered one in the past and decided against it, it may be time for a closer look at how this entity could benefit your bottom line this year.
Review your Paycheck Protection Program (PPP) funds
This program provided a much-needed boost for most businesses at a critical time, but it also could have added some complexity to your recordkeeping and tax preparation. To date, the IRS has stood fast on the position that expenses paid with proceeds from PPP loans that are forgiven will not be deductible on tax returns. As we head toward the end of the year, it’s important for every business that took advantage of PPP loans to decide whether they will apply for forgiveness and, if yes, proceed with the application. It’s still possible that some or all of the debt may not qualify for forgiveness, in which case, the expenses paid with the funds would be deductible.
If you need help understanding the PPP loan forgiveness process, we’ve answered some frequently asked questions on this topic.
Additional year-end planning resources
Don’t overlook these changes
Once you’re through checking these five ideas, it’s time to review some of the guidance and other changes this year that might affect your tax return even if you do nothing. These areas include:
- FDII and GILTI regulations that included a taxpayer-friendly high-tax exception.
- The Wayfair decision and the state reactions to it that continue to drive changes in the area of economic nexus.
- Global tax changes in countries that were made to help taxpayers cope with COVID-19.
- New guidance on the business interest limitation that should be discussed with your tax advisor.
Keep improving your business
It’s also important to continually challenge your business practices and processes to make sure you’re not missing opportunities for improvement. If you’re looking for ideas, consider:
- A review of your business debt strategies for possible improvements.
- For middle-market companies, a cost-effective transfer pricing documentation policy that can help to meet today’s needs and support tomorrow’s growth.
- An analysis of the steps you’ve taken to make sure the next generation is ready to continue your family business.
Strategies for COVID-19
Lastly, we have several resources with suggestions for possible strategies and ideas that businesses can use as we work our way through and out of the COVID-19 pandemic, such as:
- How will the pandemic affect your long-term tax planning strategies, transaction structures, and entity choices?
- Have you considered these practical tax-planning strategies for difficult times, including specific action steps?
- Have you focused your pandemic tax planning on maximizing cash flow during the crisis? There are also important non-tax strategies that could improve liquidity as well.
- Have you thought about these two steps you can take to improve your business’s valuation if you’re trying to sell during the crisis?
- How has COVID-19 changed the process of transfer pricing for multinational companies?
- What is your business doing now to prepare for the next major disruption?
- What can you be doing now to protect your workers during the pandemic?
- Have you thought about steps you can take to help you make sure your business is ready to restart? We’ve even got a checklist to help you make sure your supply chain is as ready to restart as you are and another one to get you through the ramp up period.
Plan ahead
Given all of the complications brought on by the COVID-19 pandemic, start your year-end planning as early as possible. We have a complete year-end tax guide available. In addition, if you have questions about any of the topics discussed in this alert, please contact your Plante Moran advisor.
