While every year is different, this year is more different than most. Nations around the world are still dealing with the effects of COVID-19, and it appears this will be a continuing experience for some time to come.
Something that has not changed is the importance of considering money-saving strategies that may minimize this year’s tax bill. A mid-year tax plan review gives you sufficient time to employ one or more of these four tax-limiting strategies.
1. Net Operating Losses (NOL)
Acting in your favor, the CARES Act has temporarily limited the Tax Cuts and Jobs Act (TCJA) of 2017 by removing restrictions on NOLs. Under the authority of this new law, you are permitted to retroactively move losses you suffered between 2018 – 2020 back as much as five years, meaning you could shift a 2018 business loss as far back as 2013. Because 2017 tax rates were higher then and in previous years, moving a NOL retroactively could prove beneficial to your bottom line and increase your cash flow, which is a much better option than taking a loss in 2020.
2. Excess Business Losses
The CARES Act also provided another tax-saving opportunity for businesses by retroactively eliminating the limits imposed on Excess Business Losses (EBLs) by the Tax Cuts and Jobs Act. Starting in 2018, the TCJA mandated that sole proprietorships and business organizations like S corporations or partnerships could no longer deduct business losses in excess of $250,000, or $500,000 for married joint filers. Excess losses are now temporarily re-categorized as NOLs and subject to those limitations. With this retroactive law adjustment, you should consider asking your accountant if you were subject to limited losses in 2018 or 2019. If a tax return for those years has already been filed, it could be an advantage to submit an amended return that now qualifies you for a refund.
3. Business Interest Expense
Another potential gift made available by the CARES Act involves changes to the limits imposed on deducting business interest expenses. Here, too, a provision in the Tax Cuts and Jobs Act was rolled back. In this instance the limit on deducting business interest expenses, set at 30% of Adjusted Taxable Income (ATI), has been reset to 50% of ATI for 2019 and 2020, though separate rules apply to business partnerships. There may be a tax refund waiting for you.
4. Real Estate Qualified Improvement Property (QIP) Depreciation
Finally, another CARES Act adjustment that could be a tax benefit for your business is the accelerated depreciation for real estate QIP that’s been operational after 2017. Real estate is considered QIP if the interior of a nonresidential building has been improved after the building was first made available for operations. This benefit, however, does not apply if the improvement was for enlarging the building, or if an elevator or escalator was installed, nor does it include changes made to the internal structural framework.
Assuming your property is eligible, you are entitled to claim a 100% first-year bonus depreciation on the expenditures if the improvements occurred between 2018 – 2022. You also have the choice of depreciating the expenditures over a 15-year period by employing the straight-line method.
Should this be the case and your tax advisor recommends amending your 2018 or 2019 return to claim the 100% first-year bonus depreciation, the adjustment may result in a NOL that can be shifted to a previous tax year for the recovery of taxes paid in that year. Another tactic that might serve you is to file a change in the accounting method instead of amending the returns.
The information in this blog post is intended to suggest possible tax-saving strategies that could benefit you and your company financially during the relaxation of Tax Cuts and Jobs Act rules, but in all cases you should seek the advice of your tax advisor for the specific particulars relating to your unique business circumstances.
Thank you for reading this blog post about possible ways to decrease your taxes and increase your cash flow during the unusual circumstances created by COVID-19. We welcome the opportunity to review your tax situation with our specialists, and also recommend consulting with us about the potential opportunities of pursuing a tax-advantaged investment policy. As always, Synergy Financial Management is primarily focused on building your wealth and preserving your estate. We look forward to serving you.
Joseph M. Maas, CFA, CVA, ABAR, CM&AA, CFP®, ChFC, CLU®, MSFS, CCIM
Synergy Financial Management, LLC
13231 SE 36th Street, Suite 215
Bellevue, WA 98006
This article is for general educational purposes only. Nothing should be construed as individual tax advice. Please consult a tax advisor to see if this information is right for your situation.