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Tax planning strategies for 2021

By Tracy Barbour


his was a year for the Alaska business community unlike any other. Business strategies changed and funds were borrowed or granted from multiple sources, meaning traditional expenses and revenues will likely be more complex than last April at tax time—especially given the recent tax law changes. There will presumably be a shift in how businesses in different industries are expected to file their 2020 tax returns, and this will call for a re-thinking of tax planning strategies.

In 2018, Congress passed legislation that has had a significant effect on business taxes, and this legislation will continue to impact companies reporting their 2020 taxes, according to Soldotna-based certified public accountant Joseph Moore. “A lower corporate income tax rate of 21 percent and a 20 percent deduction for pass-through entities are the most notable components of the new tax law that will affect 2020 taxes,” says Moore, a principal of Altman, Rogers & Co., Alaska’s largest locally-owned CPA firm. “Also, 100 percent deduction of eligible equipment purchases is in play for the 2020 tax year.”

In addition, many small businesses took advantage of the Payroll Protection Program (PPP). The program loaned small businesses a factor of their historical payroll costs and, if used for eligible costs, the amount could be forgiven tax-free. However, details about the forgiveness of these loans, as well as the deductibility of the costs, are still in flux. “It is hoped that action by Congress and the president will shed light on these issues soon,” Moore says in an early October interview.
Joe Moore
Altman, Rogers & Co.

The forgiveness aspect of PPP loans is a crucial issue for businesses. The state of the current tax law is that any loan amounts forgiven are tax-exempt, but the expenses paid with those proceeds are not deductible, according to Jim Meinel, CPA, who operates an Anchorage accounting firm. This effectively translates into the forgiven amount being taxable. “If the forgiveness occurs by December 31, 2020, companies will see their taxable income jump during the fourth quarter of 2020,” says Meinel. “Business owners should be working with their tax preparers to determine if their estimated tax payments should be adjusted. A key date is when the loan is legally forgiven as it is taxable income on that date. It is possible some forgiveness applications will not be processed until 2021, which would push that ‘income’ into the next tax year.”

Changes Impacting Net Operating Losses

An important factor that will affect tax planning will be whether companies received any type of government assistance through the Coronavirus Aid, Relief, and Economic Security (CARES) Act, says Chad Estes, a tax partner in the Anchorage office of BDO, which provides tax and financial advisory services worldwide. For instance, businesses that received funding through PPP, Economic Injury Disaster Loans (EIDL), or the AK Cares Grant Program will have certain reporting requirements when filing their 2020 tax forms.

One important tax-law change businesses should be aware of relates to carrying back net operating losses (NOL) to obtain refunds of previously paid taxes. Under the CARES Act, taxpayers may use a five-year carryback for NOLs arising in tax years beginning in 2018, 2019, and 2020. Estes explains: “Before the Tax Cut and Jobs Act passed in 2017, you were able to carry the losses back two years and forward twenty; then it changed to only forward with no expiration, with the deduction limited to 80 percent of taxable income. The CARES Act suspended that for 2020 and retroactively for 2018 and 2019. If a business had a net operating loss in 2018, 2019, or 2020, it can carry that loss back—assuming it paid taxes—and possibly get some of that tax back.”
Chad Estes

Having the ability to recoup previously paid tax represents a significant opportunity, according to Meinel. “This can be a great tax saver as the marginal income tax rates five years ago were substantially higher than the current rates,” he says. “The current greater depreciation deductions increase this opportunity.”

Other Important Deductions

Another major tax-related adjustment involves the CARES Act’s correction of a “retail glitch” associated with qualified improvement property. The act includes a technical correction to the 2017 Tax Cuts and Jobs Act concerning the way the cost of certain improvements to an existing non-residential building is recovered. In a nutshell, the glitch mistakenly defined qualified improvement property as 39-year property rather than 15-year property, as originally intended. Because of this, taxpayers were prevented from taking advantage of 100 percent bonus depreciation for improvements made to an interior part of a building and instead had to depreciate those improvements over 39 years. “If somebody made $50,000 of interior renovations to their restaurant, they would have had to capitalize and depreciate it over 39 years,” Estes says. “Now they can take bonus depreciation in 2020.”

Essentially, the CARES Act corrected the error retroactively to January 1, 2018. As a result, property owners can save tax dollars by either amending their 2018 and 2019 tax returns or by filing an automatic consent Form 3115 to catch up on tax depreciation. In addition, taxpayers who own nonresidential real estate used in their own businesses or who are landlords may review their 2018 and 2019 tax returns to determine whether to file an amendment or an automatic consent Form 3115 to take advantage of bonus depreciation opportunities.

Also, as part of their 2020 taxes, businesses will be able to deduct different types of expenses because of the COVID-19 pandemic. Tax deductions will still need to be “ordinary” and “necessary” to be an allowed business deduction; however, in a pandemic, what is considered ordinary and necessary has changed for some businesses, Estes says. “The same rules are there, but I think it’s pretty safe to say that mass quantities of hand sanitizers, masks, and cleaning bills for sanitation are now considered ordinary and necessary, unfortunately,” he says. “There are probably other expenses, such as additional consulting fees around human resources and accounting fees for assistance with PPP loans or payroll tax credits, which are things some businesses never would have had to deal with before.”

While many expenses related to dealing with COVID-19 are deductible as ordinary and necessary business costs, it’s a different situation for employees. As Meinel points out, one current issue involves the expenses incurred if their employer sets them up to work from home but does not reimburse all the associated expenses. “Recent tax law changes had made these types of unreimbursed expenses non-deductible by the employee on their personal tax return,” he says. “There is some sentiment in Congress to change that.”

Another tax law change relates to expanding the number of construction companies that can report income differently for tax reporting purposes than for their general-use financial statements. Previously, businesses with gross receipts under $10 million could use the cash method to report taxable income to the IRS, says Meinel, whose practice caters to commercial construction companies. “That limit is now $26 million, which means more companies are eligible to change from the accrual method to the cash method for income tax reporting and increase the chances of deferring their taxes each year,” he says.

Jim Meinel
Jim Meinel
Monitoring Crucial Legislation

According to tax experts, legislation is a principle area business owners should consider when developing their 2020 tax planning strategies. They should focus on the ongoing legislation that has already been enacted, along with any legislative proposals that are currently being considered in response to COVID-19.

Currently, there are several applicable tax proposals and bills that are in various stages of the legislative process in response to the ongoing impact of COVID-19, according to Alex Rasskazov, tax managing director in the Anchorage office of KPMG, a global audit, tax, and advisory services firm. A multitude of scenarios around potential changes also exist, depending on the outcome of the presidential and congressional elections. “Taxpayers should continue to monitor legislative developments as a result of the ongoing COVID-19 health crisis, the presidential and congressional elections, and the overall state of the US and global economies,” Rasskazov says.

Alex Rasskazov

KPMG Anchorage Tax Practice Leader Julie Schrecengost also advocates focusing on the COVID-19-related legislative changes passed this year. In addition to the expanded rules around NOLs, new opportunities for filing refund claims, and deferral of payment of payroll taxes, key legislation also includes the introduction of paid leave provisions and various payroll tax credits for certain businesses, expanded rules around interest expense disallowance, and many other items. “Businesses should consider these impacts on income tax reporting, payroll tax reporting, and their general day-to-day operations,” she says.

Julie Schrecengost

Schrecengost also says that, under certain circumstances, companies may be able to take advantage of disaster loss provisions due to the pandemic. Additionally, businesses that issue financial statements in accordance with generally accepted accounting principles may need to consider how the tax legislation passed during 2020 will impact their financial reporting.

Another ongoing tax issue resulting from recent legislative changes is companies’ ability to write off 100 percent of their equipment purchases. Prior to recent years, there were various statutory limitations sometimes preventing a full deduction, according to Meinel. “While in the short term this is a good thing, the disadvantage is that in future years there are no depreciation deductions left to take (unless you keep buying equipment), so the taxable income you deferred is right back at your doorstep the next tax period,” Meinel says. “In essence, this legislation turned equipment purchases into a mini tax shelter.”

The political landscape is another unknown, according to Meinel. As of early October, political items potentially on the table included eliminating the 20 percent qualified business income deduction, a higher capital gains tax rate, adding types of income subject to Social Security taxes (12.4 percent), higher corporate income tax rates, and various limitations on itemized deductions. “Having a tax advisor plugged into these developments will at least provide the business owner with a heads-up on what may be developing,” he says.

Tax Planning for 2021

In terms of year-end tax planning strategies for 2021, Meinel says it is important for business owners to consider the big picture. Their priority can change from year to year, whether it’s lowering taxes, strengthening the financial statement, succession planning, paying down debt, or staying in business. “But I would say that for 2021, for most businesses, it is maintaining the integrity of the core business of the company and protecting and retaining its employees,” he says. “Naturally, I will advise our clients on the usual tax-deferral strategies, but for now, I feel the more important considerations are things like retaining cash, monitoring debt levels, and taking a hard look at overhead expenses. This is the fourth economic downturn I’ve experienced with my Alaska contractors, and when these areas are attended to, it keeps the company alive to fight another day.”

“Before the Tax Cut and Jobs Act passed in 2017, you were able to carry the losses back two years and forward twenty; then it changed to only forward with no expiration, with the deduction limited to 80 percent of taxable income. The CARES Act suspended that for 2020 and retroactively for 2018 and 2019. If a business had a net operating loss in 2018, 2019, or 2020, it can carry that loss back—assuming it paid taxes—and possibly get some of that tax back.”
Chad Estes, Tax Partner, BDO
Moore advises business owners plan for the best but prepare for the worst when it comes to formulating tax strategies. “Be conservative with projections and budgeting,” he says. “Cash is king. No one really knows what the future holds.”

And Rasskazov offers this general tax planning advice for 2021: “Businesses should consult their tax advisor to evaluate the numerous tax planning opportunities available for accounting method changes and elections.”

Employing Tax Experts and Other Resources
Given the business complexities of 2020, tax experts say companies would be well advised to consult with a tax or financial advisor. This is especially true for those that have taken any sort of government assistance, whether it’s a PPP loan, AK Cares Grant, or municipal grant, says Estes, whose firm serves a variety of industries. “2020 has been a wild year,” he says. “I think everybody has had their business impacted this year in some manner. Don’t be afraid to ask for assistance.”

Rasskazov agrees. It’s challenging to navigate new tax laws and the specific details applicable to each individual situation, he says. “There are many ongoing developments and clarifications issued by the IRS that occur on a daily basis, and the IRS and Treasury have published thousands of pages of new regulations this year related to the ongoing implementation of the tax reform legislation enacted at the end of 2017,” he says.

Moore points out that the uncertainty about future tax legislation, the presidential election, and the outcome of the pandemic make for difficult tax planning. In addition, there are many new policies and tax legislation as a result of COVID-19—and more are likely to come. He says: “With unemployment at historic highs, current and future legislation will most certainly be tailored to reduce job losses and shore up revenues… Together, businesses and the tax professional can navigate these unprecedented times.”

Most companies already have a tax professional preparing their business and personal tax filings. But if not, Meinel says, now would be an excellent time to get one on board. “Alaska’s economic business cycles can be extreme for certain industries, and the COVID-19 logistical challenges, along with the political responses to it, make it that much harder on the Alaska business owner,” he says. “Having a tax professional experienced in advising clients in their specific industry will be an invaluable addition to the business’ team of advisors to achieve the owner’s business and personal goals.”

In addition to consulting with tax and financial advisory firms, business owners can take advantage of other resources to support their tax planning efforts. For instance, it can be helpful to have an accounting program with a chart of accounts tailored to the company’s particular industry as well as properly trained office staff to process and record the company’s transactions.

Government and industry websites can also be invaluable resources. For example, the Small Business Administration website provides extensive details about the EIDL and PPP programs. The Small Business Development Center website offers information about the AK Cares program., of course, contains a plethora of tax-related and general information for businesses. In addition, the Alaska Society of CPAs offers a CPA referral database at Users may search the Find-A-CPA Directory by city, size of practice, specialization, and industry expertise to find an accountant that matches their specific needs.