EPISODE 43: DHG's Troy Taylor continues his discussion on important tax planning considerations in 2020, such as planning for losses and NOLs, home office deductions and charitable contributions.
[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.
[0:00:58] JL: I’m your host, John Locke, and joining us today is Troy Taylor. Troy is a Senior Tax Manager with DHG who focuses on tax corps and specialty projects. Troy, thanks for joining us for part two of our conversation around tax planning.
[00:01:14] TT: Thank you, John. It’s great to be back.
[00:01:16] JL: Today, we're continuing our conversation about tax planning considerations, and last time we talked about issues specifically for businesses in a year of unprecedented change. Today, we're going to talk about some other important considerations when planning for losses, as well as home offices and charity considerations. Troy, why don't we start with planning for losses, specifically NOLs and carrybacks? You want to start there?
[00:01:43] TT: Sure thing. Yeah, it sounds good. So previous to the CARES Act, the net operating losses or NOLs could only be carried forward, and we're limited to eight percent of taxable income. The CARES Act brought a significant change to how NOLs are treated and created a great tax planning opportunity. For tax years 2018 through 2020, you can now carry back those NOLs five years. For corporations that have an NOL from 2018 through 2020, that can carry it back to offset income in a tax year. Those tax years before 2018 were taxed at a much higher rate, so it was 35% rate versus the 21% rate that it is today. So this creates a 14% rate difference or a permanent tax benefit that can be very beneficial to companies.
Individuals can also benefit from this tax rate arbitrage since today's maximum tax rate is 37% versus the pre-2018 maximum tax rate of 39.6% So that's another 2.6% permanent tax benefit potential there if you carry back a loss into a previous year. You obviously also have the benefit of getting cash in hand immediately of a tax refund, but this could create great tax planning opportunities if you're in a loss position for 2020 or at least close to it since you could potentially accelerate deductions into 2020 to increase that loss and then have a larger NOL carryback to claim in a tax year that had the higher tax rate.
So if you haven't looked at this for 2020 yet, about possibly increasing that NOL or being able to carry back that NOL or looking at carrying back NOLs from 2018 and 2019, then you really need to talk to your tax advisor as soon as possible to plan for those opportunities and make sure you can take advantage of them.
[00:03:48] JL: Great advice, yeah. Now, let's shift gears a little bit and talk about the opportunity for self-employed taxpayers with home offices because there's a bunch of those out there right now. So many people are working out of their homes. Isn’t there a deduction for home offices in 2020?
[00:04:05] TT: You're right, John. There is. It’s a little bit different than it used to be though. So while the Tax Cuts and Jobs Act eliminated home office deductions for normal w-2 employees, taxpayers who are self-employed can still claim that home office expense by meeting certain requirements from the IRS. So the same rules still apply though. The home office must be used exclusively and on a regular basis as a principal place of business or to meet with clients and customers. Then also, taxpayers whose businesses are operated as a partnership or an S corporation will also want to discuss with their tax advisor to see what they need to do now in order to be able to claim this deduction at the entity level prior to the yearend.
[00:04:50] JL: So the CARES Act also made changes regarding deduction limits for charitable contributions in 2020. Can you explain how this may help with tax planning this year?
[00:05:01] TT: Yeah, definitely. So a taxpayer's charitable contribution deduction is limited to a percentage of their adjusted gross income or for C corporations, a percentage of their taxable income. Now, given what's transpired in 2020, many taxpayers may have significantly reduced income. But then on the other hand, many non-profit organizations are experiencing unprecedented need. So to address these issues and to stimulate charitable giving, the CARES Act modified the deduction limitation for certain cash contributions.
Now, the 2020 deduction limitation for qualified contributions made by a non-corporate taxpayer during 2020 will be 100% of their adjusted gross income, and then you can carry forward any excess contributions above that for up to five years, so you don't lose the value of those contributions. For corporate taxpayers, the deduction limitation is now 25% of taxable income versus the 10% that it was previously. Then you can obviously carry forward any of the excess contributions. Hopefully, this helps incentivize people to continue to make charitable donations, so they can help out those who are in need but then also be able to deduct those contributions.
[00:06:19] JL: Yeah. There's no question that the non-profits have suffered this year, and knowing the tax impact of your contributions and the opportunity to help yourself and help others is big in 2020 because as we all know this has been a year of tremendous stress and suffering in the nonprofit world. So great information, great advice, Troy. Thank you so much for walking us through these important tax considerations with our audience today. Thanks for being with.
[00:06:49] TT: No problem. It’s my pleasure.
End of Interview
[00:06:52] JL: My guest today has been Troy Taylor, Senior Tax Manager with DHG. As always, we remind you that you can read more about year-end tax planning through DHG's year-end tax planning letter at dhg.com and, of course, we encourage you to discuss all tax planning considerations with your DHG tax advisor. Thank you for joining us today. I’m your host, John Locke, and I look forward to reconnecting with you again on another episode of DHG GrowthCast.