Year-End Tax Planning Considerations - Part One

EPISODE 42: DHG's Troy Taylor discusses some important tax planning considerations for businesses, including the CARES Act and PPP loans; Employee Retention Credit; fixed assets and bonus depreciation; and business interest limitations. 

Transcript

Introduction

[00:00:09] JL: Welcome to today's edition of DHG’s GrowthCast. I'm your host, John Locke. At DHG, our strength lies in our technical knowledge, our industry intelligence, and our future focus. We understand business needs and are laser-focused on company goals. In this ever-changing world, DHG's GrowthCast provides insights and thought-provoking conversations on topics and trends that address growth opportunities and challenges in the current and future marketplace. Thanks for joining us as we discuss tomorrow's needs today.

[00:00:42] ANNOUNCER: The views and concepts expressed by today's panelists are their own and not those of Dixon Hughes Goodman LLP. Always consult the advice of your legal and financial professional before taking any action.

Interview

[00:00:58] JL: I’m your GrowthCast host, John Locke, and joining us today is Troy Taylor. Troy is Senior Tax Manager with DHG who focuses on tax core and specialty projects. Troy, thanks for joining us, and we’re so glad to have you back with us after having been with you on a recent GrowthCast episode discussing – I think it was employee retention credit. So welcome back.

[00:01:22] TT: Yeah. That’s right, John. Thanks for having me back again. Glad to be here.

[00:01:25] JL: Today, we’re going to highlight several planning areas for businesses to consider as we approach the end of the year. Obviously, this has been a year of unprecedented challenges due to the COVID-19 pandemic and some other unusual natural disasters, which has caused significant disruptions to businesses this year. Troy, can you speak to some of the challenges that businesses have experienced that could impact their tax filing?

[00:01:51] TT: Sure, John. Yeah, you're right. This has been a really challenging year for pretty much everyone to say the least. Businesses everywhere felt the effects of what's going on in some capacity. Many businesses have experienced full or partial interruption of their operations, as well as disruption in their supply chains and in some cases a reduction in personnel. Because of this, they've had to revisit and shift their entire go-to-market strategy.

Fortunately though, Congress passed relief programs via the CARES Act like the Paycheck Protection Program or the Employee Retention Credit to help out these employers. Then the IRS has also issued updated guidance on The Tax Cuts and Jobs Act. So given all of these changes that have been going on, proactive tax planning has become even more important than it ever has been.

[00:02:46] JL: No question. It’s been quite the challenging year, and that's why I'd like to have you address some important tax planning considerations for businesses. Speaking of the CARES Act and PPP loans, what are some tax planning considerations for businesses who applied for and received a PPP loan this year?

[00:03:05] TT: Right. So if your business received a PPP loan this year, remember that the IRS has issued guidance clarifying that covered expenses will not be deductible if they're included in the loan forgiveness process. There's been some discussion from members of Congress that that was not the intended result when they drafted the CARES Act, but businesses should plan on the expenses not being deductible unless some form of additional legislation is passed, although that at this point this late in the year seems probably unlikely.

Another issue though is that timing of the disallowance of those expenses was not directly addressed by that guidance that came out, and it remains somewhat uncertain in cases where forgiveness decisions are not going to be made until 2021. So if a company received a PPP loan and anticipates that they may not receive a formal forgiveness decision by the year-end, they need to work with their tax advisor to figure out what their options are for deductibility for the 2020 tax year.

[00:04:10] JL: So speaking of the CARES Act, Troy, I think now is a good time to also revisit the Employee Retention Credit which is also meant to help those impacted by the COVID-19 pandemic. Can you provide some highlights regarding the credit and how it affects tax planning?

[00:04:26] TT: Of course. As we discussed in a previous episode, the Employee Retention Credit is similar to the PPP in that it served as a way for the government to get cash into the hands of employers who are still paying their employees or at least covering their health care expenses while they were furloughed. The maximum credit is $5,000 per qualified employee of a business that meets certain requirements, and there's two ways to qualify for the program. The first is to show that you are at least partially suspended business operations because of a COVID-19-related government order or show that you've had at least a 50% decline in gross receipts.

There's no limit to the number of employees who can qualify for this credit, so even large companies can take advantage of it. When people originally saw the program, it was assumed that essential businesses would not be able to qualify as an employer, but it turns out that they actually are eligible for the ERC program. However, under current law, receiving and retaining a PPP loan does disqualify an employer from the ERC. So when the program was first introduced, many taxpayers believe the credit program was intended to apply really to a very limited population of employers.

But as the IRS has issued additional guidance and information and clarified the program, many employers who originally thought they wouldn't qualify for it have looked at it again and now determined that they are eligible and have been able to take advantage of some significant credit opportunities. So in short, if you have not spoken to your tax advisor and you didn't receive a PPP loan, it's really important to talk to somebody about looking at this credit to see if there's any opportunity for you.

[00:06:15] JL: Well, great advice. We all need to be staying abreast of this information that's flowing out of the IRS, and staying on top of it could really be beneficial. I also remember that fixed assets and depreciation have been top of mind for a lot of people during this time frame, specifically how bonus depreciation and Section 179 can help with the deduction of investment costs. Troy, can you tell us more about some potential tax opportunities with these?

[00:06:46] TT: Sure. So businesses can take advantage of immediately deducting the cost of investments in certain fixed assets. These deductions can be claimed through either bonus depreciation or Section 179. Both of these provisions are very similar with certain business assets being eligible for immediate deduction, including things like equipment, furniture and fixtures, software, qualified improvement property, and any other non-building assets. The differences though between bonus and Section 179 are that you can claim bonus depreciation on used assets but not for 179. Then 179 has caps or limitations on how much you can expense, unlike bonus appreciation which is unlimited.

There's a lot of nuances with these two provisions that can get kind of complicated, so it's definitely important to talk to your tax advisor to determine what possible opportunities there could be for you and how they relate to your specific tax situation.

[00:07:50] JL: What about the changes to business interest limitations in 2020? Can you tell us how those may be favorable to taxpayers?

[00:07:58] TT: Yeah, absolutely. So the CARES Act made changes to business interest limitations that had been enacted in the TCGA which increased the limitation for businesses other than partnerships from 30% to 50% for tax years beginning in 2019. Then the limitation for partnerships also increased to 50% for tax years beginning in 2020. So there's a difference in the way they're treating corporations versus partnerships. The CARES Act also allows taxpayers to elect to use their 2019 adjustable taxable income to compute the business interest expense limitation for the 2020 tax year. So that could also be very helpful for companies as well.

[00:08:40] JL: Well, I’m just curious. Weren't there also some final regulations released this year regarding business interest limitations? It seemed like I heard something about that.

[00:08:50] TT: Yeah. That's right, John. So the IRS did release final regs this year that made changes to the types of expenditures considered to be interests subject to the limitation, as well as changes in the computation of UNICAP and the application of singular qualification for the small business exemption at the entity level. So taxpayers really may want to look back at their filing positions and compare them to the final regs that came out to see if an amendment might be necessary or even advantageous.

So considering the changes to the CARES Act, as well as the final regulations, on top of the fact that many businesses saw increased debt levels this year and added cost of COVID-19 safety measures, it's really important to understand how business interest expense limitations will affect them specifically as it can get kind of complex when you start putting everything together.

[00:09:45] JL: Thanks, Troy. Well, I’m excited to continue this conversation further in part two where we'll be discussing NOL carrybacks, some home office tax considerations, and increase in deduction limits for charities. As a reminder, you can read more about year-end tax planning through DHG’s year-end tax planning letter at dhg.com. Of course, we encourage you to discuss all tax planning considerations with your DHG tax advisor. I’m John Locke and I look forward to reconnecting with you again soon on the next episode of DHG GrowthCast.

End of Interview
About DHG's GrowthCast

At DHG, our strength lies in our technical knowledge, our industry intelligence and our future focus. We understand business needs and are laser focused on company goals. In this ever-changing world, DHG’s Growthcast, provides insights and thought -provoking conversations on topics and trends that address growth opportunities and challenges in the current and future marketplace. Join us in discussing tomorrow’s needs today.

Disclaimer: The views and concepts expressed by today’s guests are their own and not those of Dixon Hughes Goodman LLP. Always consult with your legal and financial professional before taking any action.

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