By Matthew Diment, Senior Manager
With the end of the year quickly approaching, now is the time for any last-minute planning to reduce taxable income for the year and plan for 2020 and 2021 taxes. As a reminder, any loan forgiveness under the Paycheck Protection Program is currently anticipated to create taxable income. Although the forgiveness itself is not taxable, the IRS currently is disallowing any deductions taken under that program.
If you are looking to purchase any new equipment soon and also need to reduce taxable income for the year, purchasing and getting equipment in service before year-end will provide a tax benefit. Additionally, 100% bonus depreciation is still available and can be taken on both new and used equipment. The previous error in the 2017 tax legislation which made Qualified Improvement Property subject to a 39-year life was corrected in the CARES Act of 2020. This property is now considered 15-year property and is eligible for bonus depreciation. If you had additions of this type of property in 2018 and/or 2019, you may be eligible to file a Form 3115, change of accounting method, to correct and catch up that depreciation.
Businesses that are operating as C-Corporations continue to benefit from the reduction in tax rates to 21% and the elimination of AMT tax. For any businesses that can generate a large loss, the CARES Act also brought back the net operating loss (NOL) carryback through 2020, which had gone away with the 2017 tax legislation. The NOL is eligible for a five-year carryback.
Flow-Through Type Entities
For flow-through type entities, such as S-Corporations and Partnerships, any qualified trade or business income is allowed a 20% deduction at the owner level. Certain service type businesses may be subject to additional limitations or not be eligible for the deduction. There are some limitations on the amount eligible for this qualified business income (QBI) deduction based on W-2 wages and qualifying depreciable property that may apply. Keep in mind that there are also aggregation rules for related entities with common ownership. For example, real estate may be held in a separate entity that rents to the operating business. This real estate will almost certainly have no W-2 wages associated with it, so would suggest that QBI could be limited. If you elect to aggregate these entities for QBI purposes, you may be able to utilize excess W-2 wages from the operating entity to eliminate any limitation in the related entities.
Commercial Activities Tax
If you are not aware yet, the new Oregon Commercial Activities Tax (CAT) took effect in 2020. It is a gross receipts tax based on .57% of Oregon sales over $1 million reduced by 35% of the greater of cost of goods sold or wages. For businesses over $750,000 in Oregon sales, registration is required. For any businesses expected to owe $10,000 or more for this tax, quarterly estimates should be paid in 2020.
Remember to discuss any year end planning moves with your tax professional to understand all of the implications for your specific tax picture.