With the certainty of the expiration of the Trump-era tax cuts after 2025, the new Congress will be faced with an extend-or-expire decision.  In anticipation of upcoming issues, members of Congress are already contemplating a 2025 roadmap to address this and other issues.  

Timeline for 2025

Numerous outlets have reported that during a recent Senate retreat, incoming Senate Republican leader John Thune outlined a possible roadmap for 2025 by discussing plans for two filibuster-proof bills. This includes an early-year bill involving border security, defense, and energy while saving the battle over expiring Trump-era tax cuts for later in the year.   

**Breaking** Update on Beneficial Owner Reporting.

On December 3, the U.S. District Court for the Eastern District of Texas issued a preliminary injunction blocking the Treasury Department from enforcing the Corporate Transparency Act’s filing BOI filing requirements. This preliminary ruling applies nationwide. However, it must be noted that there is expected to be an appeal by the Treasury Department which leaves the matter in limbo. 

What to do? For those who haven’t filed, at a minimum closely monitor these developments. It would also be prudent to consult with your tax advisor on the best course of action with regard to the BOI filing.

Tax Planning:  SALT Cap Workaround

One of the few downsides to the 2017 Trump-era tax cuts is the $10,000 personal deduction limit for  state and local taxes (SALT).

In response to this limit, many states developed a work-around solution for owners of pass-through entities (LLC, partnership, S-corporation). This concept allows a small business owner’s pass-through entity to pay the business owner's state tax and pass both the deduction and the tax payment credit through to the owner, in effect, by passing the individual SALT limit. Currently, over 30 states have this concept in place. 

Expanded Overtime Rules Reversed

On November 15, 2024, a Texas federal court struck down an earlier U.S. Department of Labor (DOL) rule that expanded the amount of earnings subject to mandatory overtime-pay. This ruling reversed the DOL’s previous ruling and applies nationwide.

This issue has seemingly flown under the radar but has the potential to be a significant issue for affected small business owners. In April, the Department of Labor (DOL) raised the minimum amount exempted from overtime to $43,888 from $35,568 (beginning January 1, 2025) with a provision for future indexing of amounts. Why does this matter? By default, this increase would have raised the number of workers who qualify for mandatory overtime.

Overtime Rules? What Overtime Rules?

As a reminder, the federal overtime provisions are contained in the Fair Labor Standards Act (FLSA) and basically require overtime pay for work activity that exceeds 40 hours per week. There are two important exceptions to the overtime requirement: (1) Minimum Pay Exemption, which affects workers who earn above $35,568, and (2) Job Duty Exemption, which affects employees that perform certain types of executive, administrative, or professional duties. Those affected by these exemptions aren’t required to be paid overtime.

Year-End Tax Planning and 2025 Expiring Tax Breaks

With the election cycle over, attention now moves toward early next year and the enormous number of Trump-era tax breaks that are set to expire at the end of 2025. It also clears the way for year-end tax planning opportunities and education. The following is a list of the most common questions we have received from our members.

When Do the 2017 Tax Cuts and Jobs Act’s (TCJA) Tax Cuts Officially Expire? The overwhelming majority of tax cuts expire on December 31, 2025.

Has Bonus Depreciation Expired?  No. This has been a subject of confusion for small business owners. Bonus depreciation has not expired, but it is in the process of phasing down from the historical 100% level. For 2024, 60% of qualifying business asset purchases can be immediately expensed using bonus depreciation and is decreasing by 20% each year.

Because bonus depreciation was part of the 2017-TCJA, it will be addressed in the 2025 Congress as part of the overall issue of expiring tax breaks.

Is Sec. 179 Business Expensing Still in Play? Yes. Prior to bonus depreciation, Sec. 179 equipment expensing was the historical business equipment expensing mechanism used to immediately deduct equipment purchases.

Although Sec. 179 expensing has somewhat taken a back seat to bonus depreciation, it is still available and has become more important given the phase-down of bonus depreciation.  For 2024, the maximum business equipment purchases write-off using Sec. 179 expensing is $1,220,000.

Is the 20% Small Business Pass-through Deduction Still Available? Yes. As with bonus depreciation, the small business pass-through deduction was an important part of the 2017-TCJA  and has become one of the more useful tax breaks for small business owners. This deduction is available to pass-through entities such as LLC, S-Corp, partnerships, and sole-proprietors. It, in general, generates a deduction of 20% of net small business income. This tax break is also set to expire at the end of 2025.

Are the Lower Individual Tax Rates Still in Play for 2024?  Yes. The lower rates for individuals are still in effect through the end of 2025. Because most small business owners operate in a “flow-through” entity, the lower tax rates for individuals are a significant portion of tax planning and will be addressed in the 2025 Congress.

Lower Capital Gains Rates: This issue was the subject of much conversation during the recent election cycle.  The lower capital gains rates are still in effect for 2024 and 2025 and generally carry a much lower rate than the regular individual income tax rates. The current rates are 0%, 15%, or 20% based on a taxpayer’s income level.   

Reminder: Up to $3,000 of net capital losses can be deducted against income. Any excess can be carried forward to succeeding years.

Are the Higher Estate Exemption Amounts Still in Effect? Yes. The exemption amounts represent the amounts that can be gifted or left to survivors free from the estate tax. The larger exemption amounts are available for 2024 and 2025 at over $13 million per person.    

Update: FinCEN Beneficial Owner Reporting (BOI): In early November, 44 members of Congress sent a formal request to the Treasury Department and FinCEN to consider a delay in the BOI filing deadline noting concerns about complexity and limited business owner awareness. Small business awareness continues to be a major problem. To date, an estimated 6.5 million reports have been filed out of the expected 30 million. Nevertheless, as we wait for a response, the filing deadline of December 31st is still intact.

Looking Ahead: 2025 Expiring Tax Breaks

Regardless of which candidate wins the 2024 election, there is an enormous issue facing small business owners that looms large over all planning decisions: the expiration date on many of the 2017 tax cuts.

Even though it’s a ways off, the expiration of the majority of 2017 “Trump-era” tax cuts are set for December 31, 2025. It is relevant because it is having an impact on tax planning for 2024 and 2025, and will certainly be the subject of attention in Congress for much of next year.

List of the Most Common Tax Breaks Expiring at the End of 2025:

Personal:

• Lower tax brackets

• Higher standard deduction

• Higher child tax credit

• Cap on state and local tax (SALT) at $10,000

• Expiration of higher estate and gift tax exemption

Small Business:

• Bonus depreciation

• Larger Sec 179 expensing

• Research and Development expensing

• 20% small business flow-through deduction (QBI)

Important Reminder: Upcoming Deadline for Beneficial Ownership Info (BOI) Reporting

This serves as a reminder that the required upcoming December 31st deadline to file 2024 BOI reporting to the Financial Crimes Enforcement Network (FinCEN) is still ongoing. This affects many small businesses that are registered with their respective Secretary of State to conduct business.  

Are There Any Exemptions from Filing? There are specific exemptions for entities such as non-profits, banks, insurance companies, accounting firms and other heavily-regulated industry types. There is also a specific exemption for U.S. small businesses that have more than 20 full-time employees AND reported more than $5,000,000 in gross receipts on the previous years federal income tax return.

What about Sole Proprietorships?

Unless a sole proprietorship was created in the United States by filing a document with a secretary of state or similar office, a sole proprietorship is generally exempt from the filing requirements.

Who is a Beneficial Owner?

A beneficial owner is any individual who, directly or indirectly:

• Exercises substantial control over a reporting company;  OR

• Owns or controls at least 25 percent of the ownership interests of a reporting company.

What Information is Reported About an Owner?

For each individual who is a beneficial owner, a reporting company will have to provide:

 The owner’s individual name;

Date of birth;

Residential address; and

An identifying number from an acceptable identification document such as a passport or U.S. driver’s license.

How to Report? Filing is done electronically through a secure filing system available via FinCEN’s BOI E-Filing website (https://boiefiling.fincen.gov).

When is the Report Due?

• If your company was created or registered before 2024, the report is due by December 31, 2024.

• If your company is created or registered in 2024, you must report BOI within 90 calendar days after receiving actual or public notice that your company’s creation or registration is effective, whichever is earlier.

   Where Can I Find BOI Reporting Information?

• https://fincen.gov/sites/default/files/shared/ BOI_Small_Compliance_Guide.v1.1-FINAL.pdf

• https://fincen.gov/boi-faqs

 Member Alert: Update on Employee Retention Credit

 While Congress has not passed any business related tax bills in 2024, there have been recent developments that the small business owner will find interesting and may have a significant impact. One of these is the employee retention credit.  After a halt to processing these credit claims, the IRS has issued several summer updates on the progress of this program.

 Where’s my Employee Retention Credit (ERC)?

 As you know, in an attempt to counter the high volume of erroneous ERC claims and improper payments, last fall the IRS issued a halt on processing claims filed after September 14, 2023. It appears the process is now beginning to move forward.

 In August, the IRS announced it was taking additional steps to move forward and continue with ERC processing, including updates on the processing moratorium, compliance actions and upcoming payments. Even better, the Service has identified 50,000 valid ERC claims and is quickly moving them into the pipeline for payment processing in the coming weeks. These payments are part of a low-risk group of claims. In more good news, the IRS indicated that it’s opening up the review process to claims filed between September 14, 2023 and January 31, 2024.

 The IRS also announced it recently sent out 28,000 disallowance letters to businesses whose pending claims showed a high risk of being incorrect. The IRS estimates that these disallowances will prevent up to $5 billion in improper payments.

 Source: (IR-2024-203, Aug. 8, 2024.)

Are there any signs that a claim may be incorrect?

 The IRS has been compiling a list of warning signs common to incorrect ERC claims. The following is a list of a few of the IRS-published warning signs:

• Using wages already used for Paycheck Protection Program (PPP) loan forgiveness.

• Using wages paid to related individuals (these wages are not eligible).

• Unable to support how a full or partial government shutdown suspended business activity.

• Essential businesses that could fully operate but didn’t have a decline in gross receipts.

Source: (IR-2024-198, July 26, 2024.) 

Fixing Incorrect Claims: The IRS recently reopened the “Voluntary Disclosure Program,” which is designed to help businesses who feel they may have received improper or incorrect employee retention credit payments related to the 2021 tax period(s). This program is open through November 22, 2024 and allows businesses a chance to correct improper payments at a 15% discount and avoid future audits, penalties and interest.  NOTE: according to the IRS, this program is not available once an IRS reversal letter is received.

What if my claim was improperly denied? If you receive a letter from IRS denying or reducing a claim, you may have 30-days to file an appeal if you meet all the criteria.

The House-passed tax bill, which is of significant interest to many small business members, addresses crucial issues such as bonus depreciation and expensing Research and Development costs, among several other provisions.

Senators tried to attach the House-passed tax bill as an amendment to the must-pass Federal Aviation Administration bill, but unfortunately, the Senate did not allow any amendments to be added to the Federal Aviation Administration bill.

There is still a push for Senate leadership to allow a quick vote, but it appears the measure will fall victim to election-year politics and be pushed to 2025. The GOP hopes to take control of the Senate and add it to a much larger tax package that favors their priorities.

Important: Beneficial Ownership Info (BOI) Reporting

This serves as a reminder to members that BOI reporting in 2024 is still ongoing for most small businesses. Please pay attention to the reporting requirements for those who registered a new company in 2024 or who have experienced ownership changes in 2024.

Reporting companies report beneficial ownership information electronically through FinCEN’s website: www.fincen.gov/boi. The system provides a confirmation of receipt once a completed report is filed with FinCEN.

What are the reporting deadlines?

FinCEN began accepting reports on January 1, 2024.

• If your company was created or registered prior to January 1, 2024, you will have until January 1, 2025 to report BOI.

• If your company is created or registered in 2024, you must report BOI within 90 calendar days after receiving actual or public notice that your company’s creation or registration is effective, whichever is earlier.

• If your company is created or registered on or after January 1, 2025, you must file BOI within 30 calendar days after receiving actual or public notice that its creation or registration is effective.

• All reporting companies must file an updated BOI report with FinCEN within 30 calendar days of any change in the information reported about the company or its beneficial owners, including any change in who the beneficial owners are.

NOTE: penalties for noncompliance are significant.

Is anyone exempt from filing? Yes, although for many small businesses the path is narrow. A complete list of exemption circumstances are listed in the link to FinCEN’s website. (See Sec 1.2) 

https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf

Update on Employee Retention Credit (ERC)

The problems surrounding this program have been well-documented but have mainly been caused by third-party vendors who have misled small businesses into filing incorrect, or fraudulent claims. Claims processing was suspended in September in order to attempt to catch up with the one million amended returns in backlog. The IRS has indicated at least a six month wait time for unprocessed claims.

Can I check the status of my Employee Retention Credit?

To determine the status of your claim, the IRS business assistance line is 800-829-4933 (option 3 for payroll tax questions). When researching your refund status have your social security number, federal employee identification number (EIN), tax return (Form 941-X) and tax return information readily available.

On January 1, 2024 a new reporting requirement went into effect that requires millions of small incorporated businesses to electronically file a report with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) disclosing detailed information about the owners of a small business.

Where did this originate? The new filing requirements originated in 2021 with the passing of the Corporate Transparency Act (CTA). This law was passed to enhance transparency in entity structures and ownership to assist federal law enforcement agencies in combating money laundering, tax fraud, terrorism financing and other illicit activities.

**Very Important: Who has to file a Beneficial Ownership Interest (BOI) report?** Every domestic corporation, LLC, or other entity created by the filing of a document with a Secretary of State or similar office under the law of a state or Indian tribe is required to file a Beneficial Ownership Interest (BOI) report unless it qualifies for an exemption (see below). This also applies to foreign incorporated companies who were similarly filed. 

The stated purpose of the BOI filing is to create a database which gives law enforcement agencies the information to “crack down on anonymous shell companies, which have long been the vehicle of choice for money launderers, terrorists, and criminals.”

Are there exemptions from filing? There are 23 categories of entities that are exempt. Unfortunately for many small business owners, most exemptions are for entities that are already subject to substantial federal or state regulations. 

For example, those that file reports with the SEC, banks, credit unions, money services businesses, securities brokers and dealers, tax-exempt entities, insurance companies, state-licensed insurance producers, and accounting firms.

The following link (see Section 3-Reporting Company, Q. 1 & 2) provides a list of entities exempt from filing as well as an exhaustive list of FAQs. https://www.fincen.gov/boi-faqs

Are there any exemptions for small  businesses’ that aren't in specific industries?  One of the 23 exemptions includes an exemption for a “large operating company.” According to the A small business is exempt from filing if it meets all three of the following:

1. Employs more than 20 full-time employees in the United States,

2. Has filed a federal income tax or information return in the United States for the previous year reporting more than $5 million in gross receipts or sales; and

3. Has an operating presence at a physical office within the United States.

What about sole proprietorships? Many small businesses operate as unincorporated sole proprietorships.  This business type is exempt from the Beneficial Ownership Interest reporting requirements. 

What about a one-person LLC? Because single owner LLCs are required to file articles of incorporation, it meets the requirement for filing unless one of the exceptions are met.

When does the initial BOI report have to be filed?

• Companies created before January 1, 2024 must file its initial BOI report by January 1, 2025.

• Companies created on or after January 1, 2024 and before January 1, 2025 must file a report within 90 calendar days of the date on which it receives notice that its creation has become effective. Those created after 2024 have 30 days to file.

What kind of detailed information about ownership has to be reported?

• Companies created before January 1, 2024 have to provide information about the company and about its beneficial owners.

• Companies created on or after January 1, 2024 have to provide information about the company, its beneficial owners, and its company applicants.

Year-End Tax Matters Update: Part 2

Year-end legislation: At this point, there is no official pending legislation, but the hope is that an end-of-year omnibus or an early 2024 spending bill will address the following important tax breaks for small businesses:

• Restore bonus depreciation to 100%

• Increase the Sec. 179 expense limits

• Restore the immediate expensing of R&D costs

• Make permanent the small business income deduction for pass-throughs

• Two-year increase in standard deduction by $4,000

Long-Term Capital Gains Favorable Rates: The favorable rates are still in effect for long–term capital gains, defined as those held for more than a year. The long-term gains rate for married couples is generally 0% at AGI under $89,250 and 15% at AGI under $553,850. The rate caps at 20% when AGI is over $553,850. These rates can be significantly lower than the standard individual income tax rates. Net gains on capital assets held less than a year are taxed at the individual normal rates.

Employee Retention Credit Withdrawal Process:  An area that has been overrun with incorrect credit claims, oftentimes at no fault of the small business owner, the IRS has announced a new Employee Retention Credit claim withdrawal process for small business taxpayers who are concerned about the accuracy of an ERC claim.

The new process allows a small business to withdraw a credit claim to avoid receiving a refund for which they're ineligible. Withdrawn claims will be treated as if they were never filed. Further, the IRS will not impose penalties or interest.

Reminder #1: Be Aware of the Employee Health Care Reporting Threshold. 

Many small businesses have less than 50 full-time employees. But be aware that if that threshold is exceeded, a business with 50 or more full-time-equivalent employees is required to file Form 1095-C with the IRS as well as to the employee. This form reports annual health insurance coverage info for each full-time employee. Failure to file this info comes with IRS penalties for non-filers and late-filers to the tune of  $310 per employee for 2024 filings.

Reminder #2: New Information Returns Electronic Filing Requirements.

Very important. There are new mandated electronic filing requirements for 2023 information returns (filed in 2024) that are significantly different than 2022, emphasize on significantly. Under prior rules, electronic ?ling was required for an information return only when it exceeded a 250-return threshold. This was determined on a per-return-type basis. (i.e. Form(s)1099, W-2).

The new rule reduces the electronic filing threshold to only ten returns. Here’s what’s markedly different: returns of different types must now be aggregated to determine if the threshold of ten is met. 

To assist with the electronic filing of Form 1099 series, the IRS developed a new online portal called the Info Returns Intake System (IRIS). This free electronic filing service requires no special software. Though available to any business of any size, IRIS may be especially helpful to small businesses that currently file Forms 1099 on paper to the IRS.

Returns affected by the electronic filing mandate include partnership returns, corporate income tax returns, unrelated business income tax returns, withholding tax returns for U.S. Source Income of Foreign Persons, information returns, registration statements, disclosure statements, notifications, actuarial reports, and certain excise tax returns, among others.

In other words, this mandate basically requires most small businesses to electronically file all information returns.

Despite 2023 being uneventful in the context that none of the extenders have been addressed, there are still numerous year-end tax issues that impact a small business owner.

First things first, we start with the two favorites of the small business community:

• Bonus Depreciation: Yes, it’s still available in a scaled-down version, from 100% in 2022 to 80% in 2023.  Nevertheless, the immediate deduction of 80% of  2023 equipment purchases is still an immediate, powerful tax savings tool.

  It should be noted that this write-off is scheduled to continue to decrease by 20% until phased-out. It should also be noted that the reinstatement of this tax break has also been on Congress’ radar since mid-year. There’s still a chance that full bonus depreciation will be restored with year-end, last second legislation.
  

• Small Business Income Deduction: This powerful tax break is still around in 2023 and allows a self-employed or small business owner to write-off 20% of the qualified net income from small business pass-through companies.  This tax break is in effect through 2026, unless made permanent.

1099-K Reporting- Small Business Owners Get a One-Year Reprieve: Many small business entrepreneurs receive payments from third party online platforms such as Venmo, PayPal, eBay, Airbnb and Etsy. 2023 was the target year for reporting these payments to the IRS. This reporting has been pushed back to 2024, and the threshold for reporting will start at $5,000 instead of $600.

The net result for 2023 is that reporting will not be required of third-party vendors unless the small business owner received over $20,000 and has more than 200 transactions in 2023. IRS Notice 2023-74

Annual Gift Limits: Each person can annually gift another person up to $17,000, if married it doubles to $34,000 annually, without cutting into the lifetime estate and gift exclusion of $12,920.000. 

Is there a tax if I exceed $17,000 for any one person? No. It simply means that the excess reduces your lifetime exclusion, and you may have to file a gift tax return reporting the gift.   

Does the annual $17,000 limit apply to all gifts in total?  No. The $17,000 is per recipient. Remember, the recipient isn’t taxed on receiving the gift.

Employee Credit Retention Withdrawal: The IRS recently announced a new ERC claim withdrawal process for those who filed an ERC claim and are concerned about its accuracy. The new process lets certain businesses withdraw their claims to avoid getting a refund for which they're ineligible.

Withdrawn claims will be treated as if they were never filed and waive penalties or interest. The following link addresses this process:  https://www.irs.gov/newsroom/help-for-businesses-steps-for-withdrawing-an-employee-retention-credit-claim

Are Any Major Provisions Expiring?

Most of the Trump-era tax breaks expire after 2025, including the lower income tax rates, estate tax exemption, and small business 20% deduction.

According to Congressional members on both sides of the aisle, there will not be significant major tax legislation in 2023, which is not surprising given the proximity of the Presidential election season.   

Bonus Depreciation is still around: There’s been quite a bit of confusion about bonus depreciation. Is it still here, or is it over? Rest easy; bonus depreciation has not expired. For 2022, bonus depreciation is the full 100%. After 2022, this popular tax break does not expire, but it is reduced for 2023.

This most favored of tax breaks by the small business owner is scheduled to decrease in 2023 from 100% to 80% and then decrease in 20% increments each year thereafter. However, many lawmakers believe that bonus depreciation is the one tax item that will be addressed in 2023 and restored back to 100%, given the current economic conditions.       

Don’t forget about Sec.179 expensing: Given the focus on bonus depreciation, it is easy to forget that the more traditional method of immediately deducting business equipment, traditionally known as “business equipment expensing,” is still around.  Although the differences between bonus deprecation and “equipment expensing” are beyond this discussion, Sec. 179 is still around and can have relevant use in tax planning for business equipment purchases.

Be Wary of Employee Retention Credit claims:  One of the programs Congress used to  encourage small businesses to keep their workers employed was the Employee Retention Credit  (ERC), which provided valuable payroll tax credits for those that qualified. This program has worked well for some, but many small businesses did not meet the qualifications.

Unfortunately, there has been an increase in third-party advisory companies falsely promoting promises of large refund claims, often filing these claims without reviewing the validity of the qualifications. The IRS is warning small businesses that these payroll credit filings are under intense scrutiny and carry large penalties for wrongly issued refunds. Small business owners should take great care in making sure whoever files for this credit is well-versed in the qualifications.

Why the scrutiny? This credit is based on employee wages. However, you cannot use the same wages for the credit that was used to obtain PPP loan forgiveness. As most small business owners know, the foundational use of PPP monies was to pay employee wages. 

2023 Business Meals Deduction and mileage rate: The 100% business meal reprieve is over and reverts back to 50% in 2023. The standard mileage rate remains at 65.5 cents-per-mile, which is where it was for the last half of 2022.

E-filing deters taxpayer identity theft: While it may seem strange to some that tax return paper-filing is still a thing, the fact is the IRS still has to process thousands of these types of returns each year. This creates several problems that can be eradicated by e-filing. The main ones are protection from identity theft and quicker processing of the tax return.

For many small businesses, tax planning doesn’t begin until the last quarter of the year. It can be especially true in a year that has experienced wild swings in the economy. This issue will focus on a hodge-podge of recent developments that may be of significance to small business owners.

Bonus Depreciation for 2022

We’ve written on this extensively, mainly because this is one of the more powerful tax planning tools available to equipment-intensive small business owners.

As you know, bonus depreciation allows for equipment purchases to be completely expensed in the year used in your business. There is a misconception that bonus depreciation either has diminished for 2022 or has outright gone away.  For clarity, 100% bonus depreciation is still in full force and effect for 2022.  It is, however, scheduled to scale back by 20% each year after 2022 making bonus depreciation equal to 80%, 60%, 40%, and 20%.

Note: it is widely speculated that the 100% deduction will either be made permanent or extended, but we anticipate those issues to be addressed with year-end extenders.

Expiring Extenders

Speaking of extenders, Congress goes through this every year with expired or expiring tax provisions.  With most of the Trump-era tax cuts still active through 2025, the majority of business-related tax savers have not expired. And, yes, that includes the 20% small business tax deduction.

2022 capital gains rates

We address this issue often because we receive questions about it often. The lower capital gains rates have not been changed and are not scheduled to expire.

IRS penalty relief for 2019 and 2020

Were you assessed a late-filing penalty for one of these years? If so, you will be pleased to know that the IRS announced it is abating (refunding) these penalties. This is in recognition of the great hardship on taxpayers during the worst of the Covid pandemic as well as the IRS processing problems that caused quite the backlog in processed returns.

Do I need to do anything?

No. It is automatic and the refunds began in late September.

Are the penalties for late payment of taxes also abated? 

No.

Business mileage rate

In case you missed it, the mileage rate for business use of company vehicles increased to 62.5 cents per mile from July to December of 2022. It was 58.5 cents per mile for the 1st six months of 2022.

Student Loan Forgiveness

Without rehashing the particulars of this controversial new program, we do need to address several issues that you need to be aware of.

Will I be taxed on the forgiven loan?

Not at the federal income tax level (Form 1040). However, while it is true that there will be no federal income tax consequence to loan forgiveness (emphasis on federal), be careful to make sure that your particular state will not tax the forgiveness. At this early point in the process, some states are on record acknowledging that the loan forgiveness amount will be taxable. We will provide a list of these states as they become final.

Can I opt out of the federal loan forgiveness program? 

Yes. In response to a recent lawsuit contesting the legality of this program, the federal government will offer an opt-out provision available to those who do not wish to use loan forgiveness. The Department of Education will provide the application to be used should this interest you.

Spring Tax Cleaning

 As is usually the case in mid-term years, all is fairly quiet on major tax legislation developments. But, there are still some tax-matters that you need to be aware of.

 Update on Expiring Tax Provisions

 While it is true that most of the Trump-era tax cuts don’t expire until 2025, there are a few temporary Covid-related tax savers that go away after 2022 and another that scales back.

 100% Business Meal Deduction Through 2022: We are all painfully aware that a full tax deduction is rarely ever available for business meals. This is especially painful for those who have a large M&E budget.

 Thanks to Congress’ effort to jump start the restaurant business hard-hit by Covid, Congress relaxed these rules to allows for 100% write-off in 2021 and 2022 for the full cost of business-related food and beverages purchased from a restaurant. The deduction is normally limited to 50% of the cost of the meal.

 How does a small business qualify for full 100% meal write-off?: A business owner or an employee of the business must be physically present. It should be noted that the definition of restaurants include establishments that provide meals or beverages to retail customers for on-premises or off-premises consumption.

Business Equipment Expensing: We report on this often and will continue to do so given its importance to small business. The full 100% bonus depreciation write-off for 2022 business equipment is still in effect, but it is scheduled to scale down in 20% increments after 2022.     

Given current economic conditions, this could be one that Congress either extends or leaves at full throttle for the time being.

Other Expiring Provisions: Other expiring provisions include incentives for biodiesel and renewable diesel as well as premium assistance credits on health coverage purchased through a government  exchange.

A comprehensive listing of expiring credits for 2022 and thereafter can be found at https://www.jct.gov/publications/2022/jcx-1-22/

Update on IRS Backlog Issues

Backlog of Unprocessed Returns: Still waiting on your tax refund? A common complaint that has been well-publicized is the problem of unprocessed tax returns resulting in held-up tax refunds and unresolved tax problems. The majority of these issues involve paper-filed Form 1040 series returns. As of April, the IRS reported that there were over 10 million unprocessed returns related to 2021 and 2022 filings, again mostly those filed by mail.

Where’s My Refund?: Speaking of refunds, for those with outstanding refund amounts, the IRS announced in late May that it has enhanced a tool on its website that allows you to see the status of the past three years refunds. You will need your social security number, filing status, and expected refund in order to track this information. It can be found at https://sa.www4.irs.gov/irfof/lang/en/irfofgetstatus.jsp

IRS Destroyed Paper Information Returns Due To Backlog: According to a report from the IRS, it destroyed 30 million unprocessed paper-filed information returns related to the 2020 filing season. Most of these were in the Forms W-2 and 1099 series and were destroyed mainly due to storage and technology issues.  These returns were primarily used to cross-check already filed returns.

Problems With the Recovery Rebate Payments: You will recall during the COVID crisis many received recovery rebate payments spanning over two years. To be sure, this was a monumental task with a short turn-around and worker shortage issues during the pandemic.

As was feared, based on a recent report from the Treasury Department, the IRS erroneously issued improper Recovery Rebate Credit payments totaling $898 million: $819 million to ineligible taxpayers and $80 million that should have been paid but wasn’t.

I Didn’t Receive My Rebate Credit. What To Do?: There’s good and bad news. At this point the IRS doesn’t have the workforce necessary to recover the erroneous payments or correct it for those who should have received the payment. If you believe you qualified for the payment, you can file an amended individual return to claim the credit for 2020 and/or 2021.

The Tax Landscape for 2022

Now that filing season is over, or at least extended farther into 2022, we can talk about the status of several of the small businesses most used tax breaks and their status for 2022. 

Potential Legislation for 2022:  Most of President Biden’s focus, from a tax perspective, was embedded in the Build Back Better legislation which, for the most part, left intact the 2017 Trump tax breaks. That legislation stalled in Congress. 

For 2022, things have been relatively quiet on the tax front. The Administration has published an outline of President Biden’s budget proposals which include several high-earner tax tweaks. At this point, it is difficult to see any tax legislation that would create additional unrest to the small business community. 

 What About the Status of 2022 Tax Breaks?

 We have received numerous membership inquiries regarding the 2022 status of existing tax breaks, mainly those coming from the Trump-era tax cuts. More specifically, many have questioned whether the Trump-era tax breaks are still in effect in 2022. 

The general rule on the life-span of Trump-era tax breaks is that, for the most part, all are still in full effect through 2025. Below are a few items of particular interest to most small businesses and owners. 

100% bonus depreciation: The 100% bonus depreciation write-off for business equipment purchases (new and used) is still in full effect in 2022, as well as, the traditional “Sec. 179” equipment deduction. However, after 2022, 100% bonus depreciation is scheduled for phase-out thereafter by  20% per year.  

Bonus Depreciation on Heavy Trucks and SUVs: According to the IRS, one of the great benefits of bonus depreciation is that is can be taken in its entirety on heavy pick-up trucks and SUV purchases, unlike purchases of luxury or passenger vehicles which have annual deduction limitations. This provision is also still in effect for 2022.  

20% Small Business Pass-Through Deduction: Arguably one of the two most important (along with bonus depreciation) tax breaks for small businesses, this one is specifically targeted towards pass–through small businesses such as LLCs, S-corps, and sole-proprietors. 

While this tax break was debated numerous times in the 2021 Build-Back-Better negotiations, it has not been altered and is in full effect through 2025. 

What about regular C-corporations? While it is true that regular C-corporations don’t qualify for the small business deduction, it is also true that the tax rate was dropped to a flat 21% (35% prior to TCJA) AND it is permanent. There is no scheduled phase-out or sunset of this rate. 

Long-term capital gains: The 2022 favorable long-term capital gains rates still has three tiers (based on taxable income):

• 0% capital gain rate up to $83,350.   

• 15% capital gain rate up to $517,200.

• 20% capital gain rate over $517,200. 

State and Local Tax Deduction (SALT): Despite attempts at increasing the limit during the Build-Back-Better debates, the individual itemized deduction for state and local tax (SALT) write-off is still capped in 2022 at $10,000 for those that itemize on individual return.  

Another Reminder! Employee Retention Credit (ERC): According to the IRS, many small business owners completely overlooked this employee payroll tax credit.  The credit is available to businesses that experienced significant quarterly declines in gross receipts in 2021(20%) and/or 2020 (50%) compared to 2019. It also applies to businesses that experienced a full or partial shutdown of operations as a result of a government order limiting commerce due to COVID-19 during 2020 or 2021. 

As a reminder, even though the wage period ended on September 30, 2021, if you think you met the criteria for this credit you can still file amended payroll tax returns up to three years after original due date. 

Employee Retention Credit (ERC) and New Start-Ups: New start-up businesses that begin operations after February 15, 2020 and have less than $1 million in average revenue are still eligible to apply for the credit. 

These calculations can carry a degree of complexity so consider consulting your tax advisor if you need to revisit the Employee Retention Credit.

Year End Tax Planning Reminders

It’s hard to imagine but year-end is fast upon us and time to consider tax planning moves.  Fortunately, it appears there will be no major increases in tax rates during the current legislative season. Now it is time to issue reminders of the 2021 tax breaks still in play that may warrant your attention.

Business Planning

Is Equipment Expensing Still in Play?  Most definitely, yes. This most favored tax break among small business operations is still available in its entirety. The following will refresh you on some of the particulars of equipment expensing:

• Full business equipment write-offs are still in effect using expensing and 100% bonus depreciation options.

• The full expense can be used even where purchase and use of equipment occurs at end of year.

• 100% bonus depreciation can be applied to new or used business equipment. At one point show-room floor new was the only option.

• Bonus depreciation can be applied to improvements made to the interior of commercial buildings (more below).

• Bonus depreciation is not inhibited by a business income limitation. Traditional expensing, however, is limited to the net income of the business.

More on Expensing Building Improvements

Normally, building improvements are deducted through depreciation over a period of years.  However, certain qualified interior building improvements are eligible for immediate bonus depreciation and expensing. Examples include interior improvements to a building (but not for enlargement), elevators or escalators, internal structural framework, roofs, HVAC, fire protection, alarm, and security systems.

Phase-Down of Bonus Depreciation Is Coming:

Absent any future changes, you have one more year for 100% bonus depreciation, then it begins to phase down as follows: 2023-80%; 2024-60%; 2025-40%; 2026- 20%.

Small Business 20% Pass-Through Tax Deduction: This deduction was untouched by recent legislation and is available to those who operate as a partnership ,S-corp or sole proprietor. While beyond the scope of this writing, there are ways to maximize this deduction, especially where your income limits exceed the ability to use the deduction. May be prudent to review this tax break with your tax advisor.

Cash-Basis Taxpayers: Prepaid 2022 expenses can still be deductible if paid by year end.

Corporate Tax Rate Unchanged: Not many operate using this entity (C-corp) structure, but for those that do, the tax rate is unchanged at 21%, which is a historical low and, more significantly, may be lower than your individual rate.

Individual Planning Considerations

Manage Capital Gains and Losses:  There are still  three tiers of long-term capital gains rates based on taxable income: 0%/$80,800; 15%/$501,600; 20%/ over $501,600.

SALT Deduction:  Currently capped at $10,000, Congress is still debating an increase to $80,000, or some variation there-of. If increased, paying anticipated state tax liabilities before year-end will generate increased deductions for itemizers.

Consult your tax advisor for the most ideal way to use these planning reminders.

1. For those who qualify for the credits but have yet to file, you have three years from the due date of payroll tax returns to claim the credit.  
2. Start-up businesses that began operations after February 15, 2020 can still take the credit on wages paid through year end 2021.

• No tax increases on the small business operator. It DOES NOT include proposals that called for a 26.5% top corporate income tax rate, a 39.6% top individual income tax rate, and a new 25% long-term capital gains and dividend rates.
• Keeps alive the 20% small business deduction for pass-through businesses and does not cut the estate and gift tax exemption amounts. 

• Raises the cap on the state and local tax (SALT) deduction from $10,000 to $80,000 effective for 2021 tax year. 
• Expands the reach of the 3.8% tax surcharge on unearned/passive income to include business income for those with 1/2 million of taxable income. If passed, it would begin 2022.

• Surtax on high-income individuals ($10 million) and trusts, limitations on qualified small business stock exclusions, continuation of a temporary current-law limitation on excess business losses. 
• Tax on the book income of billion-dollar corporations. 
• Includes numerous credits for the alternative energy industry.

• Full business equipment write-offs are still in effect using expensing and 100% bonus depreciation options.
• The full expense can be deducted even when purchase and use occurs at end of year.
• 100% bonus depreciation can be applied to new or used business equipment. 
• Bonus depreciation can be applied to improvements made to the interior of commercial buildings. 
• Bonus depreciation has no business income limitation.

Tax Issues In The Infrastructure Bill: Its Fluid

 Pinpointing anything solid in the Infrastructure bill  is a perilous task given the day-to-day changing landscape in Congress. Nevertheless, it appears most of the initial tax increases impacting small business owners have been taken off table. We’ll briefly outline a few things as they currently stand.

 What looks to be out-of-the-bill at this point:

•  Increase in individual and corporate rates
• Increase in capital gains tax
• Cutting the estate tax exemption in half
• Basis step up on inherited assets
• Small business 20% tax deduction

What appears to be on the table:

• Increase the individual deduction for state  and local tax (SALT).
• Minimum tax on large corporations
• Tax on large-corp book income (those that have high book income but low taxable income).

Employee Retention Credit: Again

We are talking about this one more time because it is the most underutilized and misunderstood tax break available to a small business. This credit is one in a group of the three (unlimited expensing and PPP forgivable loan) most important benefits afforded a small business owner over the last several years. Here’s why:

• It’s a free shot. It’s a refund on payroll dollars that have already been spent to pay employees.
• Receiving a PPP loan (and subsequent forgiveness) doesn’t disqualify the credit.
• New businesses that “started” in 2020 can qualify.
• The bar to qualify is fairly low, especially in 2021.
• It’s retroactive to 2020 (i.e. available for both 2020 and 2021).
• Qualification parameters are fairly simple to determine.
  

 The following are several questions that can assist you in researching this credit.

Is my business too big? In 2021, you are if you have over 500 employees. In 2020 the limit is 100 employees. Otherwise, you are good.

How do I know if I qualify?

At a minimum, if one of three things occurs you need to investigate:

1.  2020: you had a quarterly decline of 50% or more in gross receipts over same quarter of 2019. If so, the credit is 50% on up to $10,000 of annual wages and health benefits paid per employee. Thus, $5,000 is the maximum annual credit per employee for all of 2020.
2.  2021: the credit is expanded for businesses who have, or will, experience a 20% quarterly decline in 2021 revenue over 2019. If so, the credit is 70% on the first $10,000 of quarterly wages and health benefits paid per employee. Thus, the maximum credit per quarter, per employee is $7,000. 
3. You fully or partially suspended operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes due to COVID-19.

Does PPP loan forgiveness disqualify me? No. Small business owners that qualify can receive both PPP loans 1 & 2 and the Employee Retention Credit.  However, you can’t use the same wages in calculating the credit and forgiveness.

What if I started a new business? The credit was expanded to include small start-ups opening after February 2020 having less than $1 million in average gross receipts.

Employee Retention Credit

Background: Overshadowed in last year’s tax relief bill(s) was a wages tax credit that was camouflaged by all of our efforts to navigate and apply for the confusing and sometimes complex PPP loan funds. Both of these were intended to assist small businesses in keeping employees on the payroll. At the time these programs came online, the CARES ACT made you choose between PPP monies or the wage tax credit. For obvious reasons, the PPP Loan monies took priority. Recently, Congress enacted Legislation that allows those who received PPP funding to use  the credit for those that qualify.

Revised and Retroactive. In dealing with tax breaks, there can be no sweeter word than “retroactive”.  Late in 2020 Congress backtracked in the Consolidated Appropriations Act and allowed a tax credit to be claimed in 2020 so long as the wages were NOT used in the PPP Loan Forgiveness computation. 

Better still, Congress allows those qualifying to go back to 2020 to claim these credits using amended payroll tax returns. With that as a lengthy set up, let’s look at the particulars.

Who qualifies for the clawback of 2020 tax credits? The ability to retroactively claim wage credits is limited in scope to a very specific target group that either:

• had operations suspended or limited due to  Covid-related government order in any quarter of 2020, or
• your business suffered at least a 50% decrease in gross receipts in any quarter of 2020 compared to the same quarter of 2019.

How much is the credit? The maximum credit per employee is 50% of eligible wages paid per employee capped at $5,000.  Again, it is important

to note that the wages used for the credit can not be the same wages used in the PPP loan forgiveness application.

How can they not be the same wages?  Wages that fall outside the PPP covered period would be one example.  Also, using non-payroll costs as part of your PPP funds-usage when applying for PPP forgiveness could possibly free up wages to be used for the credit.

Does my eligibility ever expire? Yes. It ends in the quarter of 2020 where your gross receipts exceed 80% of the same quarter of 2019.

When does the credit begin? In the quarter that your gross receipts drop by 50%.

Is the credit available in 2021? Yes, with slightly modified qualifications. We’ll address this topic in the next issue. 

IRS experiencing historic delays: A common complaint we are receiving is that some either haven’t received 2019 tax refunds or, even scarier, their 2019 tax return has still not been processed.   Is this possible? 

Unfortunately, yes. According to the IRS Commissioner, over 335,000 2019 tax returns have yet to be processed. 

Blame it on late legislation that required structural changes to the return processing task that created a strange interaction between the 2020 and 2019 tax returns, such as the earned income tax credit and economic stimulus check. This has required manual verification of amounts. Add to this, the significant shortages of IRS staffing and it is a perfect storm for backlog.

By now Does my Round 1 PPP loan have to be already forgiven to qualify? 

No. However, you must have used or plan to use all Round 1 funds by the time you apply
for Round 2.

What is the application deadline? 

March 31, 2021.  

Is PPP Round 2 forgivable?  

Yes, and you can write-off the expenses paid with PPP Round 2 funds.

Do I have to use the same lender as before?

No. But it may be simpler as your lender already has your information needed to apply
for Round 2.

I did not apply for PPP Round 1.  Can I apply for Round 2?  

Yes. The application directs first time borrowers to use the rules and instructions in effect in Round 1. HINT: there is no revenue test to qualify if you are  a first-time applicant.

Can I still apply if I returned my Round 1 funding? 

Yes. If a borrower returned part of a PPP loan or did not accept the full amount of the loan proceeds it was previously approved for, the borrower may apply for an increase to its existing loan for the difference between the amount retained and the amounts previously approved.

I did not qualify for Round 1.  Am I eligible for Round 2?  

Probably not. Unless an exception applies, the rules in place for both are generally the same.  

Is the funding available to the same groups as Round 1? 

Yes. Self-employed, independent contractors, sole proprietors, partnerships and incorporated small businesses are all eligible for Round 2. Plus, several more were added such as chambers of commerce, trade associations and real estate boards.

What if I started my business in 2020?  

You must have been in business by February 15, 2020 to be eligible.

What if I opened my business in 2020 and before February 15?  

Compare your gross receipts in Q1 to each of the succeeding quarters of 2020 to determine
if a 25% drop.

What if I was in business for all or part of 2020 but now permanently closed?  

You must be in operation at the time of loan application to be eligible.

What if I temporarily closed my business during 2020 but re-opened?  

You can apply and will likely use the same revenue comparisons as a “seasonal” business. 

Who is excluded?  

Companies with more than 300 employees do not qualify. The limit was 500 employees
in Round 1. 

How is gross revenue defined for 25% test?

The qualifier for PPP Round #2 is a 25% or more revenue decrease on either an annual basis from 2019 to 2020, or quarter-to-quarter from 2019 to 2020. The SBA defines revenue as “receipts in whatever form received or accrued by the borrower from whatever source, including from the sales of products, interest, dividends, fees, commissions, etc.” 

Does my Round 1 PPP funding count as revenue for the 25% test?  

No. Proceeds received from the initial first PPP loan are excluded from the calculation of gross receipts as are, apparently, capital gains and losses. 
 

For additional information, please contact us at research@nwyc.com

PPP Round 2: Small Business Relief

By now you are aware that Congress has enacted a second round of forgivable PPP funding for small businesses with the recently passed “Relief” bill. Round 2 will operate similar to the first with a few variations along with a welcome simplified forgiveness process.

Who Qualifies?

Must have at least 25% revenue loss to qualify. Unlike Round 1, which had no qualifiers other than business necessity/uncertainty, to qualify for Round 2 you must have experienced a revenue loss of 25% or greater in any one quarter of 2020 compared to the same quarter of 2019. Or, if easier, you can compare annual 2020 revenue to 2019 revenue in determining your 25% gross revenue decrease. NOTE: Revenue does not include PPP Round 1 funding.

What if my business opened in 2020? Your business must be open by February 15, 2020 in order to qualify for Round #2.

Businesses with over 300 employees don’t qualify.   Round 1 had a limit of 500 employees. Round 2 has a cutoff at 300 employees. 

Does my Round 1 PPP loan have to already be forgiven to qualify.  No. However, you must have used all Round 1 funds by the time you apply for Round 2.

 How Much?

The maximum loan amount is $2 million. The maximum was $10 million in Round 1.

How do I determine the loan amount? Similar to Round 1, the loan amount will be 2.5 times 2019 average monthly payroll, although you can choose to use 2020 payroll if it’s higher than 2019.

Restaurants and Entertainment Businesses qualify for higher funding amounts. The loan amount will be 3.5 (verses 2.5 for all others) times your average monthly payroll in 2019 (or 2020, if higher). Congress is attempting to assist the many food and entertainment businesses that were particularly hammered in 2020 with closures and limitations on customer usage.

Use of Funds

Broader use of PPP funds.  Similar to Round 1, Round 2 can be used for payroll, rent, and mortgage expenses. The list was also expanded to include certain business operating expenses, workplace protection costs to protect employees from Covid-19 and uncovered property damage related to public disturbances.

Forgiveness

Are the loans forgivable? Yes, and simplified for many. Those with PPP Round 2 loans of $150,000 or less will use a one-page forgiveness application.

What do I have to do for forgiveness? As before, at least 60% must be used on payroll costs. You have between 8-24 weeks to use the funds, which should allow ample time to meet the “spending” requirements.

Will forgiveness be taxable?  No. And expenses paid with forgiven funds can be deducted on the tax return.

Do I have to use the same lender? No. However, because most of the same info used in Round 1 will be used to determine Round 2, it may be advantageous to use the same lender who has this information on file. 

Where and how do I apply? The initial deadline for applying is March 31, or until funds are gone. 

Application is located at: SBA.gov/ppp

Small Business PPP Funds Protected In Relief Package

President Donald Trump signed into law a major coronavirus stimulus package along with an annual budget measure, avoiding a government shutdown before a Monday night deadline

H.R.133  contains a second round of Covid help for small business that includes another round of Paycheck Protection Program (PPP) funding, an extension of unemployment benefits, $600 per person stimulus checks, and funding for things such as schools, coronavirus testing and vaccine distribution.

And, perhaps as important, Congress sends final clarification to the IRS that prevents any portion of PPP funds from creating adverse tax consequences.

Congress says yes to deducting business expenses funded with PPP monies: Shortly after the PPP program was launched the IRS issued a harsh ruling that indicated expenses paid with forgiven PPP funds could not be deducted. This ruling, in effect, created thousands of dollars of backdoor- tax on small businesses who relied on the PPP funds to pay employees, rent, and an assortment of other employee-related costs. In early December, the IRS reiterated this position.

Thankfully, Congress included a provision in the recent Coronavirus Relief package that clarified, once and for-all, that forgiven PPP loans will not create a tax issue, either when forgiven or in deducting the related expenses. This was the right move by Congress.

Full write-offs for business meals: The 50% limitation on deducting business meals has been in place so long that it’s hard to remember otherwise. In an attempt to jump-start the restaurant and food business, for the next two years business meals will be fully, 100%, deductible without limitation. What about entertainment? No change here, apparently. Entertainment still looks to be non-deductible.

Year End Tax Reminders

Despite all that has happened this year, it would be easy to forget the many tax breaks available to you as you finish 2020.

Is first-year 100% bonus depreciation still on? Yes. 2020 business equipment purchases still get 100% immediate tax write-off under the bonus depreciation rules. Machinery, equipment, computers, appliances and furniture are the main benefactor of this write-off, but business vehicles also can use some of its cost for bonus depreciation.

What about bonus depreciation on real property additions? Yes. Congress restored the immediate write-off for certain additions to pre-existing commercial property.

Is bonus depreciation set to expire? No. 100% bonus depreciation stays in effect through 2022, with the percent write-off phasing down incrementally after that.

What about the 20% small business deduction? Wildly popular, but a little complicated at times, this business write-off is still in play for pass-throughs such as LLC, partnerships, SCorps, and sole proprietors.

Is the individual SALT limit still in effect? Yes. This one has caused quite the fuss, especially in states with high tax rates. The state and local tax deduction is still $10,000 and can only be used if your total itemized deductions are higher than your standard deduction amount.

Note on tax planning: Historically, you would be encouraged to pre-pay anticipated state income tax amounts by year-end to increase your write-offs. Beware though, with the $10,000 limit on state and local tax, and higher standard deduction amounts, this might not benefit you anymore.

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.