Tax Planning in An Election Year: It’s Fluid

Tax Planning in An Election Year: It’s Fluid

Given all that has happened in 2020, it seems almost anti-climactic to discuss tax planning, but tax filing season is coming regardless of which political party is in control. This issue will take a look at several pending items that will have a huge impact on tax matters for 2020 and 2021 as small businesses formulate the tax planning process and will have an update on the vitally important PPP loan forgiveness/expense write-off issue.

Election impacts on the Trump-era 2017 tax act. Year-end tax planning always includes an element of timing, playing one year against another. For example, it impacts the small businessperson in decisions such as the timing of equipment purchases and year-end compensation, to name a few. This year may be the most difficult in recent memory due to the dreaded word “uncertainty”. 

What is the significance of the Senate race? Keep in mind we are speaking only of the potential impact on tax breaks and rates. Although not a certainty in the short term, Democratic members of Congress are on record as eyeing a roll-back of many of the 2017 tax rate and tax breaks to their pre-act rates on items such as bonus depreciation and estate tax rates. By way of example, the popular 100% business equipment write-off would likely roll back to 50%.

Aren’t the 2020 tax rates set regardless? Yes, 2020 tax rules won’t change. However, for tax planning purposes, not yet knowing the makeup of the Senate can impact 2021 rates. It creates a difficulty in planning between the two years. For tax planning purposes, does it matter, and if so, how?  The short answer is it matters.

Should the tax rates change (i.e., increase) significantly in 2021, a tax deduction would have more value in 2021 than 2020. Conversely, accelerated taxable income, such as year-end bonuses, would carry a lower tax rate in 2020 than 2021.The following example highlights the decision model that we are facing:

Example: At the 2020 current rate, the corporate tax savings on purchasing a $100,000 piece of equipment is $21,000 in 2020.  If the 2021 rates re-set to 35%, the corporate tax savings value in 2021 would be $35,000, a $14,000 difference. NOTE: These numbers are using federal rates only.

Should the tax rates re-set, the mere postponement of purchasing a piece of business equipment to January could have significant potential savings.  So, does careful tax planning matter to the small businessperson this year?  Most certainly it does.

This is Big! Congress pushing IRS on PPP loan tax breaks. Congress was fairly clear in its intent with the PPP program: provide small business with funding to keep employees on the payroll. Inherit in that intent was the idea that the PPP loan proceeds would not create a tax burden on the backend, thereby undermining the very thing the PPP was designed to protect, small business cash flow burden.

Inexplicably, and against all Congressional intent, the IRS has taken the position that expenses paid with PPP funds cannot be used as tax write-offs. If enforced, it makes taxpayers who received PPP funds choose between loan forgiveness, or the tax break. 

This hasn’t set well with Congress as the top leaders on the Senate Finance Committee recently issued a joint statement saying the Treasury “missed the mark” on Congress’ intent.

What happens next? Expect year-end legislation clarifying that taxpayers can use the expense write-offs in tandem with PPP loan forgiveness. That could be included in government spending legislation that Congress must pass before federal funding runs out.