2020 Year-End Tax Planning Strategies

by Karen Stern

Election years always create uncertainty for businesses. Add the unpredictability due to COVID-19, and 2020 presents unique year-end tax planning challenges and opportunities for small businesses.

Net operating losses
The CARES Act temporarily loosened the rules for carrying back net operating losses (NOLs). While previously disallowed under the Tax Cuts and Jobs Act (TCJA), NOLs arising in 2018, 2019 or 2020 can now be carried back five years allowing you to claim refunds in previous tax years. No taxable income limitation applies for years beginning before 2021, meaning NOLs can completely offset income in those years.

Businesses can gain even larger refunds by accelerating deductions into years when higher pre-TCJA tax rates were in effect. However, be cautious, as carrying back NOLs can trigger a recalculation of other tax attributes and deductions, such as Alternative Minimum Tax (AMT) credits and Research and Development (R&D) credits.

Capital investments and qualified improvements
This isn’t a new strategy, but the TCJA further enhanced capital investments as a useful way to reduce income taxes by expanding bonus depreciation. The CARES Act also fixed a drafting error in the TCJA that left qualified improvement property (QIP), generally interior improvements to nonresidential real property, ineligible for bonus deprecation.

For qualified property (computer systems, purchased software, vehicles, machinery, equipment, office furniture and QIP) purchased after September 27, 2017, and before January 1, 2023, businesses can deduct 100% of the cost of new and used property (subject to certain conditions) in the first year the property is placed into service. Special rules apply to property with a longer production period.

Businesses that made qualified improvements in 2018 or 2019 can claim an immediate tax refund for the missed bonus depreciation.

Income acceleration
Given the current level of uncertainty, it might be advisable to accelerate income to take advantage of the current low rates while they remain applicable, especially if you expect to have less income this year. There are several ways to accelerate income, such as realizing deferred compensation, exercising stock options, recognizing capital gains, or converting a traditional IRA into a Roth IRA.

For more information on year-end tax planning strategies, contact Debbie Vandeven, Tax Partner, at 314.983.1386 or dvandeven@bswllc.com.

Karen Stern, CPA, (kstern@bswllc.com), partner in charge, Brown Smith Wallace Entrepreneurial Services Group, provides tax and accounting services for companies ranging from start-ups to $20 million in revenue.