Dear Clients & Friends,
Even under the best of circumstances, this has been an extraordinarily difficult year for everyone. We missed seeing you in person this past year and look forward to welcoming you back to our office on 35th Street when it is safe to reopen. Our current plan is to stay remote for the upcoming tax season; we appreciate your understanding and flexibility as we navigate this—hopefully—once in a lifetime debacle.
As we write our annual tax-planning letter, we are constantly reminded that this has been no ordinary year. The fall has been dominated by a highly partisan election, a second wave of COVID-19, and an economy struggling to recover from the worldwide pandemic.
However, it now seems there is light at the end of the tunnel. We are keeping our fingers crossed that the distribution of a vaccine will reduce the impact of COVID-19 and allow us—and our clients—to resume operations as usual. If you would like to schedule a phone or Zoom appointment for next year please do so at KernerCPA.Apptoto.com or by clicking here.
CARES Act, New COVID Relief Bill, and the PPP
As you may be aware, there is a new bill currently under consideration which would build upon the CARES Act passed in the spring.
Under the CARES Act, if you received a PPP Loan and subsequent forgiveness, that loan is excluded from gross income for federal income tax purposes. The new stimulus bill reverses the Treasury Department ruling that business expenses paid for with these forgiven PPP Loan proceeds are nondeductible for federal tax purposes—a big win for many of you. The bill would also dramatically simplify the Loan Forgiveness process by reducing the application to a single page.
Additionally, the new bill calls for a second round of PPP Loans for businesses that can show at least a 25% decline in gross revenue for any 2020 quarter versus last year. The new round of PPP money would be made available to new borrowers and those who have already received an initial loan. More information can be found here.
Additional CARES Act Changes
The CARES Act also contains numerous revisions to the Tax Cuts and Jobs Act (TCJA), including some one-time opportunities for taxpayers to reduce taxes and obtain refunds from prior years. For example, while the TCJA had repealed the net operating loss (NOL) carryback rules, the CARES Act reinstated them for 2018, 2019 and 2020 losses.
If you have a taxable loss in 2020, careful analysis is needed to maximize the tax benefit of such loss since a 2020 loss can be carried back five years. However, losses incurred in 2021 will no longer be eligible for any carryback. As a result, this represents your last chance to recover tax payments made in 2015 through 2019 by amending those year’s returns and carrying back a NOL.
Qualified Retirement Plan and RMD Changes
The CARES Act also extended the deadline for adopting a qualified retirement plan. If you are a small business or self-employed, you now have until September 15, 2021 (partnerships and corporations) or October 15, 2021 (self-employed employers) to adopt a qualified retirement plan for 2020.
Please note the SECURE Act changed the Required Minimum Distribution rules, effective December 20, 2019. If you reached age 70½ in 2020, you now have until April 1 of the year after you turn 72 to take your first RMD.
Impact of Teleworking on the Tax Landscape
Another change in 2020: Many of you are now teleworking and are interested in taking a home office deduction. If you are an employee paid on a W-2, you are still not eligible to take a home office deduction. However, self-employed taxpayers or business owners may take a percentage of their home expenditures against their income. It may be useful to employ the “Simplified Method” to determine these home office deductions—instead of tracking separate expenditures of the home—merely multiply $5 by the allowable square footage of the business portion of the home (using the smaller of 300 square feet or the actual space). Additionally, when using the Simplified Method, you are not required to depreciate the cost of your home—which would then be added back to your basis in the event of a property sale.
The pandemic has certainly proven we can work remotely which may be prompting one to ponder where they live and work since, for right now, it is one and the same for so many of us. Moving from high-tax states like New York and New Jersey poses residency audit risks. Careful considerations to each individual’s facts, circumstances, and intent are critical as well as researching a state’s specific residency and domiciliary laws, regulations, and cases. There may be aggressive enforcement of nexus laws and taxpayers should expect to receive nexus inquiries from state and local tax authorities in the next few years. Employers considering allowing employees to continue teleworking past the state of emergency orders need to understand the implications not only for income, non-income and sales tax, but also payroll withholding and state unemployment insurance requirements. We are happy to help you wade through this on a case-by-case basis.
A Couple Other Reminders
As always, we are here to help and are especially grateful this year for our continued professional relationships. We are sending love and well wishes to you and your families and hope for a return to some semblance of normalcy soon.
Best wishes in 2021,
Charles & Staff