Dec. 14, 2020

This paid piece is sponsored by Eide Bailly LLP.

Year-end tax planning in a year like no other can present some unique challenges – but also opportunities for business leaders who take strategic steps.

Eide Bailly LLP’s Jim Jarding gave us a look at how to contain costs and protect key assets during this uncertain time.

Year-end tax planning should always be on a business’ agenda, but what makes the end of 2020 even more critical? What are some unique elements to be considering this year?

There a couple of items unique to this year’s year-end tax planning. First is the Paycheck Protection loan. Companies that received a Paycheck Protection loan have the opportunity to have the loan forgiven based upon certain criteria. Even though the loan forgiveness is tax-free income, the IRS has ruled that the expenses paid with Paycheck Protection loan funds are not deductible, thereby treating the loan forgiveness income as taxable. Given the size of the loans that some companies received, this could be a significant increase to taxable income this year. We have been having conversations with our clients so they are aware of this.

There have been some discussions that Congress may pass legislation to allow these expenses to be deductible. In fact, there was a provision to allow these expenses in the latest stimulus package, so there is hope that Congress will pass legislation to allow the expenses. We will continue to monitor this. Second, with the potential for tax increases and changes to certain tax deductions with a new administration, clients are assessing what might be done now to mitigate income taxes. Certain items that clients are looking at include accelerating long-term capital gains and reassessing estate plans to take advantage of higher unified credit amounts.

Depreciation generally is a key year-end topic to address. How should businesses be approaching this in 2020?

Equipment and certain leasehold improvements are eligible for 100 percent deduction under the bonus depreciation rules if acquired and placed in service this year. This includes new or used property. One thing to consider for year-end planning is the acquisition of equipment as long as the taxpayer can acquire the property and place it in service before Dec. 31. Also, if the taxpayer acquired or remodeled a building this year, a cost segregation study could be done to help classify the building costs into shorter-life assets to take advantage of the 100 percent bonus depreciation rules.

Charitable contributions also tend to be looked at as the year winds down. Are there some special considerations businesses should be making this year?

Again with a potential change in income tax rates and rules, taxpayers are looking to accelerate charitable contributions to make sure they get full deductibility this year. Also, with businesses still having fairly profitable years and the inclusion of the PPP loan forgiveness expenses back into taxable income, charitable contributions can help lower business owners’ individual income tax liability. For taxpayers older than 70 1/2, they might want to consider still doing qualified charitable distributions from their IRA accounts even though the required minimum distributions were suspended for 2020.

While a lot has changed this year, some constants of year-end planning likely still remain. Are there some reminders businesses should be considering?

For cash basis taxpayers, look to accelerate payment of expenses and delay invoicing of revenue to defer collection of receipts. Look at capital equipment needs to acquire equipment before the end of the year.

Looking ahead to 2021, do you have a sense for how and if the landscape is changing from a tax perspective? Are there some things businesses should be watching for or putting in place now in anticipation?

The items that I see business owners assessing given a change in tax law is the acceleration of long-term capital gain income, making charitable contributions sooner rather than later, acquiring equipment sooner rather than later and reassessing estate plans to take advantage of the higher unified credit.

To learn more, contact the Sioux Falls Eide Bailly team at 605-339-1999 or click here.