tax planning for businesses in 2020 - bkd
TRANSCRIPT
Tax Planning for Businesses in 2020
Strategies to Consider amid COVID-19 & After the Election
November 11, 2020
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What does the current environment mean for your business’ …
Tax Rate Cash Flow Choice of Entity
M&A Strategy
Exit Strategy
› An intentional process of reviewing your tax & financial matters to
• Take advantage of benefits within the tax law• Help reduce your tax burden• Review changes & updates• Evaluate & set goals
What Is Year-End Tax Planning?
Current Corporate Tax Rate› Flat federal rate of 21%
› No federal alternative minimum tax
› Various state & local tax rates
Your Tax Rate
Current Pass-Through Tax Rates› Seven brackets with top rate of 37%*^
› Qualified business income taxed at top rate of 29.6% subject to limitations*^
› Capital gains & qualified dividends taxed at top rate of 20%*
› Alternative minimum tax at top rate of 28%* applies above exemption amount
Your Tax Rate
*Plus 3.8% net investment income tax on unearned income when modified gross income exceeds $200,000 for single filers ($250,000 married filing jointly (MFJ))^Expires after December 31, 2025, except amounts would continue to be indexed for inflation using chained measurement of the consumer price index where applicable
Future Rate Proposals› Corporate tax rate
› Alternative minimum tax
› Pass-through tax rates
› Capital gains rate
Your Tax Rate
TIMELINE OF THE TCJA PROVISIONS
Expire Employer credit for paid
family & medical leave Threshold for medical &
dental expenses raises to 10% of AGI
Favorable treatment for S corporation conversions to C corporations
Effective Majority of TCJA
provisions went into effect for tax years beginning after December 31, 2017
Effective Repeal of
deduction & income inclusion for alimony paid
ACA individual mandate reduced to zero
2018 2019 2022
Expire R&E expenditures
capitalized & amortized over five-year period
Depreciation, amortization, & depletion removed from adjusted taxable income calculation for business interest limitation
Bonus depreciation begins to phase-down
2026
Expire Majority of
individual TCJA provisions, including rates, QBI deduction, & increased lifetime exemption
2023
Expire Bonus
depreciation begins to phase-down
Payroll-Related Relief › Payroll tax credits for emergency paid sick
leave & expanded FMLA*
› Employee retention credit
› Deferral of employer’s portion of Social Security tax & self-employment taxes
Your Cash Flow
* Applies to leave taken between April 1, 2020–December 31, 2020
TCJA-Related Relief› Allowed net operating loss carrybacks*
› Removed excess business loss limitation*
› Relaxed limitation on business interest expense*
› Fixed 15-year life for qualified improvement property
Your Cash Flow
* For 2018, 2019, & 2020
Qualified Improvement Property
› CARES Act fixed TCJA glitch making QIP 15-year property & eligible for 100% bonus depreciation
› Leaving 2018 & 2019 QIP unchanged as 39-year property is impermissible accounting method
› May amend previously filed 2019 tax return with accounting method change rather than waiting for 2020 tax return or having to amend two tax returns
› Limited business interest expense to sum of business interest expense, floor plan financing interest & 30% of adjusted taxable income (ATI)*
› After 2021, limit is modified to disallow add back for depletion, depreciation & amortization
Business Interest Expense LimitationTCJA CARES Act
› Limitation increased to 50% of ATI for 2019 & 2020 tax years (2020 for partnerships)
› Businesses may elect to use 2019 ATI to calculate limitation for 2020
* Exceptions available for small taxpayers, regulated public utility businesses, & certain real property & farming businesses
› Limits aggregate deductions attributable to trades or businesses over the aggregate gross income/gain to $255,000 for single filers ($510,000 MFJ) in 2019
› Excess losses treated as NOL
Excess Business Loss LimitationTCJA CARES Act
› Repeals limitation for tax years beginning after December 31, 2017, & before January 1, 2021, i.e., 2018 through 2020
› Limits deduction to 80% of taxable income for losses arising in tax years beginning after December 31, 2017
› May generally not be carried back
› Carried forward indefinitely
Net Operating Loss (NOL)TCJA CARES Act
› Suspends 80% limitation for tax years beginning after December 31, 2017, & before January 1, 2021, i.e., 2018 through 2020
› NOLs generated during 2018 through 2020 may be carried back up to five tax years
COVID-19-Related Relief› Small Business Association (SBA)
• Paycheck Protection Program (PPP)• Economic Injury Disaster Loans (EIDL)
› Treasury Main Street Facilities• Main Street Business Lending Program• Municipal Liquidity Facility
Your Cash Flow
Factors to Consider1) Effective tax rates
2) Future tax rates
3) Accounting methods
4) Compensation & benefits
5) Ownership & succession
Your Choice of Entity
Corporations Pass-ThroughsNumber of tax brackets One, flat rate Seven brackets for
individuals (four for trusts/estates)
Top tax rate 21% + 23.8% on qualified dividends 37% + 3.8% net investment income tax
Alternative minimum tax None 28% (after exemption subject to phaseout)
Other tax Accumulated earnings tax (20%) Tax on undistributed personal holding
company income (20%)
Self-employment tax (15.3%) Built-in gains tax
Other rate considerations Full/partial gain exclusion on qualified small business stock
QBI deduction (20%) Limitations on SALT
deduction Limitations on losses
Current Business Tax Rates Compared
Top Proposed Business Tax Rates
Type of Entity Current Law Trump Proposal Biden ProposalCorporation 39.8%
(21% + 0.79 * 23.8%) 39.04%
(20% + 0.80 * 23.8%) 59.25%
(28% + 0.72 * 43.4%*)
Pass-throughWith QBI 33.4% through 2025
(37% * 80% + 3.8%) 33.4% beyond 2025
(37% * 80% + 3.8%) 43.4%(39.6% + 3.8%)Without QBI 40.8% through 2025
(37% + 3.8%) 40.8% beyond 2025
(37% + 3.8%)
* Assumes change in preferential rate on qualified dividends
Factors to Consider› Current uncertain economic outlook &
increased market volatility
› TCJA changes to business interest expense limitation in 2022 make leverage less attractive
Your M&A Strategy
Questions to Consider› What’s your timeline
› What will the transition look like?
› How will the business be affected before & after the transition?
› Are there any management succession issues?
› How will the transition contribute to your personal financial goals & estate plan?
Your Exit Strategy
“Perfect” Planning Environment› Historically low interest rates
› Down economy & depressed valuations
› Increased lifetime exemption available under TCJA through 2025
› Possibility of future tax law changes
Your Exit Strategy
Steps to Simplify Year-End Tax Planning1) Review your current tax situation
2) Consider changes to your tax situation
3) Evaluate effect of tax developments
4) Assess timing of income & deductions
5) Revisit your estate plan
Your Strategy
Strategies to Consider› CARES Act-related
• Plan for losses • Explore or revisit cash flow-related
relief options• Plan charitable contributions
Your Strategy
Strategies to Consider› Election-related
• Accelerate income & defer deductions• Evaluate timing of charitable
contributions• Consider choice of entity
Your Strategy
Strategies to Consider› Wealth transfer-related
• Revisit estate plan• Implement wealth transfer strategies• Review tax basis planning strategies• Consider charitable trusts
Your Strategy
What does the current environment mean for your business’ …
Tax Rate Cash Flow Choice of Entity
M&A Strategy
Exit Strategy
Questions?
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Thank You!The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered