What an unusual year 2020 has been for tax preparers, business owners, employees, and their families! Businesses have been forced to close, allowed to re-open under varying restrictions, and had to struggle with decisions that greatly impacted their employees. Negotiating loan and grant options and their paperwork and requirements have added to the challenges of decision making and cash flow concerns.
Many taxpayers have completed tax returns now that the automatic extension deadline of July 15 has passed. About five months remain for 2020 tax planning. Several Acts of Congress have provided opportunities to lower taxes for 2020, with the elimination of the IRA required minimum distribution being a major benefit to retirees. Qualifying taxpayers have until August 31 to return RMDs received earlier this year to their IRAs or to convert those funds to Roth IRAs. There are some restrictions, but the act was more lenient than may have been expected, since inherited IRA RMDs are also eligible for this favorable tax treatment.
Since the Tax Cuts and Jobs Act eliminated Form 2106 deductions on Schedule A, most employees working from home will not benefit from home office deductions. However, some employers have wisely used accountable plans to help reimburse employees in a tax-free manner for home office deductions. Employees who see working from home as a long-term result of the pandemic may want to encourage their employers to consider setting up accountable plans if they haven’t already done so.
To increase cash flow, accrual-based taxpayers may want to consider writing off worthless business bad debts. Idle equipment may still be depreciated if the taxpayer can demonstrate an intention to return the equipment to active use as soon as conditions permit.
Some employers will have tax credits available for providing paid sick leave or family or medical leave for their employees who miss work for coronavirus-related reasons. This includes parents who cannot work because schools and daycares are closed.
Self-employed individuals are also eligible for a refundable credit against income tax for qualified family leave equivalent amounts. An eligible self-employed individual is an individual who regularly carries on any trade or business and would be entitled to receive paid leave under the Emergency Family and Medical Leave Expansion Act if the individual were an employee.
There is also an Employee Retention credit available to qualifying employers that has various restrictions and qualifiers. Employers can claim an advance employee retention credit on Form 7200 to increase cash flow.
Taxpayers who have been diagnosed with covid-19 or whose spouse or dependent has been diagnosed with covid-19 can withdraw up to $100,000 in coronavirus-related distributions from retirement plans without a 10% penalty for early distributions, until December 31. Others eligible for this benefit include those experiencing adverse financial consequences from being quarantined, furloughed, or laid off, or even as a result of reduced hours or lack of childcare. Loans are another option from qualified plans, and repayment can be delayed. In addition, the income tax on coronavirus distributions may be paid back over three years.
The CARES act creates an above-the-line charitable deduction for 2020 (not to exceed $300). The act also modifies the AGI limitations on charitable contributions for 2020, to 100% of AGI for individuals and 25% of taxable income for corporations.
In these days, every little bit helps!