Although 2020 is history (thankfully), business taxpayers can still take steps that will reduce last year’s federal income tax liability and / or federal income tax liability for future years. This column provides some ideas. Decide whether or not to claim 100% first-year bond depreciation. For qualifying assets placed in service in 2020, business taxpayers can deduct 100% of the cost in year 1. 100% instant write-off is allowed both for new and used qualifying assets, which include most categories of tangible depreciable assets. While claiming 100% first-year bonus depreciation whenever allowed is generally considered tax-wise, think twice before claiming it for 2020 additions if you anticipate higher tax rates in future years. In that case, consider forgoing the additional depreciation on last year’s performance and instead depreciate the assets in question over several years. That way, write-offs from depreciation will offset future income that you suspect might be taxed at higher rates (perhaps much higher rates). The choice to claim 100% first year bonus depreciation for 2020 asset additions, or not, is made on last year’s return.
The NOL Factor The Coronavirus Relief, Relief and Economic Security Act (CARES Act) allows a five-year repayment privilege for a business net operating loss (NOL) arising in a fiscal year beginning in 2020. Depreciation can potentially create or increase a NOL for the year. If so, the NOL can be rolled over and you can recover some or all of the federal income tax paid for the return year. So this factor argues in favor of claiming a 100% first year bonus depreciation on last year’s profitability. Talk to your tax professional about what makes the most sense for your specific situation. Take Advantage of COVID-19 Tax Relief The CARES Act included several valuable federal tax relief provisions for business taxpayers. These provisions may affect last year’s business performance. For example: The CARES Act liberalized the company’s net operating loss (NOL) deduction rules for NOLs that arose in fiscal years beginning 2020. Those NOLs can carry over up to five fiscal years. Therefore, a NOL that is reported on last year’s return can be carried over to a prior year and allow you to recover some or all of the federal income tax paid in the carry-over year. Because federal income tax rates were generally higher in the years before the Tax Cuts and Jobs Act (TCJA) came into effect, NOLs carried over to those years can be especially beneficial. The CARES Act allows much faster depreciation for Qualified Improvement Properties (QIPs) of real estate. QIP is generally defined as an improvement to an interior portion of a non-residential building that is put into service after the date the building was first put into service. The provision of the CARES Act allows a 100% bonus depreciation during the first year for the cost of QIP that was put into service in 2020. Alternatively, you can depreciate the QIP that was put into service in 2020 over 15 years using the method straight line. An unfavorable provision by the TCJA rejected current deductions for so-called excess business losses incurred by individuals in fiscal years beginning 2018-2025. An excessive business loss is one that exceeds $ 250,000 or $ 500,000 for a married couple filing a joint return. The CARES Act suspended the Excess Business Loss Disapproval rule for losses that arose in tax years beginning in 2020. Talk to your tax professional about other federal tax relief provisions that may be available for your 2020 tax year. company. Decide to extend your business return or not Because 2020 was such a strange year, business taxpayers have many additional things to consider for last year’s federal income tax returns. You have to evaluate the aforementioned COVID-19 tax relief provisions. You have to think about the impact of the elections on taxes for 2021 and beyond. Because what you choose to do on last year’s return can affect your tax bills for later years, extending last year’s return could be a smart move. That would give you more time to evaluate all the relevant factors in your specific situation. The deadline for filing the 2020 Form 1040 for a person who operates a business as a sole proprietor or as a single-member LLC that is treated as a sole proprietorship for tax purposes is 4/15/21, but you can extend the date Deadline 10/15/21 filing IRS Form 4868. The filing deadline for the 2020 calendar year return of a partnership, LLC treated as a partnership for tax purposes or S corporation is 3/15/21, but you can extend it to 9/15/21 by filing IRS Form 7004 . The deadline for filing the 2020 calendar year return for a C corporation is 4/15/21, but you can extend it to 10/15/21 by filing IRS Form 7004. Qualified Business Income (QBI) Deduction on Your Personal Return By 2020, you can potentially claim a federal personal income tax deduction up to 20% of the Qualified Business Income (QBI) of a sole proprietorship, an LLC treated like a business sole proprietorship, an LLC treated as a partnership for tax purposes, a partnership, or an S corporation, however, the deduction is subject to restrictions that may apply to higher levels of personal income. If you qualify, the deduction is claimed on your 2020 Form 1040, which is due April 15 or October 15 if you file. You may want professional help interpreting QBI’s complicated deduction rules and calculating your maximum allowable amortization.