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PPP Loans, COVID-19, Election Year, and Why You Need a CPA

December 9th, 2020 • Blog

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Jim Moran, CPA, MST

2020 – Oh what a year! As the days get shorter and the temperatures drop, now is a great time to meet with your CPA and focus on how the events of 2020 will affect your year-end 2020 tax liability.

Election Results and Control of Congress

The results of the November 3rd election will influence 2020-year end tax planning. The control of the United States Senate will not be decided until January 2021, when the two Georgia Senate seats will be decided. Currently, the Republicans hold a 50-48 advantage.

If the US Senate turns in favor of the Democrats, it is safe to say there could be some changes to the US Tax Code, including a higher corporate tax rate and higher rates on capital gains for all individuals, as well as overall higher rates on individuals that make over $400,000 per year. In this scenario, you might want to generate capital gains and income in 2020 and defer expenses until 2021.

If the Senate remains in the hands of the Republicans, all bets are off as we are likely to continuing seeing gridlock in Washington. Tax planning becomes more complicated as we do not know where future individual and corporate tax rates might head, although the consensus thinking is that corporate rates will increase and individual rates are likely to increase on individuals with incomes over $400,000.

Paycheck Projection Program

Did your business receive a PPP loan during 2020? If so, the IRS issued Notice 2020-32 clarifying that no deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan when the income associated with the forgiveness is excluded from gross income.

What the Notice does not do, is specify in which tax period the deduction for expenses should be reduced – so the question remains whether the deductions should be disallowed in the taxable year that the expense was paid or if it should be in the taxable year in which the borrower is notified of the amount forgiven by the lender and/or the SBA. It does imply that the receipt or accrual of the forgiveness is not required before the expenses become nondeductible. In Revenue Ruling 2020-27, the IRS double-downed on non-deductibility of expenses paid by PPP loans, concluding that if the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year, then the expenses are not deductible.

In addition, the intent of Congress under the CARES Act was that the loan forgiveness was tax-free and there is currently legislation before Congress to codify their intent. The question is: Will Congress act?

Lastly, a reminder to employers that received payroll tax credits under the CARES Act, against their 2020 payroll taxes, the amount of payroll tax expenses must be reduced by the amount of the credit received.

2020 Year-End Business Strategies

Depreciation and Expensing: 100% bonus depreciation remain in effect in 2020. Additionally, Code Sec 179 expensing has an investment limitation of $2,590,000 for 2020 with a dollar limitation of $1,040,000. Again, the results of the presidential election might want you to rethink these strategies.

The CARES Act also increases corporation’s charitable deduction taxable limitation from 10% to 25% for 2020 only.

2020 Year-End Individual Strategies

In December 2019, the SECURE Act was passed which increased the age of those who needed to start taking required minimum distributions (RMDs) prior to 2020 from age 70.5 to age 72. However, the CARES Act, eliminated any RMDs that needed to be taken during 2020. Again, depending on the election results, it still might be worthwhile to take an RMD during 2020, as future RMDs and taxes could be higher in a Biden Presidency.

The CARES Act does allow an above the line charitable contribution deduction of $300 for individuals that do not itemize deductions for 2020 only.

As for deductions, again depending on the outcome of the election, it might be wiser to defer deductions until 2021.

There is little time to implement any of these strategies, businesses and individuals should be reaching out to their CPAs now, so that your year-end planning can be started as soon as possible. A CPA can help taxpayers navigate these different scenarios and minimize a taxpayer’s liability. We are here to provide the human touch to taxes.

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