Tax Strategy for 2020 under a Biden or Trump Presidency | MABETAX

Speaking of tax strategies for the end of 2020, there are many known topics in relation to tax planning between now and December 31, 2020, but at the same time there is a lot of uncertainty. The great unknown as to who is elected in the general elections and the constant questions are: when will it be decided, and how will it affect you?

Polls indicate that a Democratic victory is likely, however, the same case was in the 2016 election that showed that the polls may be wrong. So what if Biden wins and what are the tax strategy options that can be implemented?

Joe Biden’s tax plan affects everyone, but the change varies based on your income level. Let’s see below what the fiscal strategies may be for the end of 2020.

For High Income Taxpayers Earning Over $ 400,000

• Increase in individual income tax rates
• The ordinary income tabs will go up for people in the upper tax bracket at a rate of 39.6%. Additionally, a 12.4% FICA tax would be imposed on salaries above $ 400,000, raising the effective rate to more than 50%.
• Elimination of qualified business income tax deduction for transparent business owners. This can increase the tax tab for high income by 10% (from 29.6% for those eligible for the QBI deduction at the highest proposed rate of 39.6%).
• Similar exchanges will be eliminated (Section 1031 Exchanges).

Other repercussions:

• Long-term capital gains and qualifying dividend tax rates would increase at ordinary income tax rates for income greater than $ 1 million.
• Obamacare’s 3.8% surcharge on net investment income would remain in effect.

For low and middle income taxpayers

• 26% Retirement Contribution Credit
• This would eliminate the deduction for retirement plan contributions, essentially turning them into all Roth contributions, but will provide a refundable tax credit equal to 26% of the amount contributed.
• In other words, you put $ 100 into your IRA, you don’t get any deductions, but the government puts $ 26 into that account as well.
• This is a benefit for low- and middle-income taxpayers and puts them on an equal footing with high-income taxpayers who receive a higher tax benefit because they paid taxes and paid it at a higher rate, providing significant benefits for taxpayers. retirement plan contributions.
• Now you make a profit, whether you pay taxes or not.
• Improvements in personal income tax credits
• Senior Child Tax Credit (increased from $ 2,000 for children under 17 to $ 3,600 for children under 6 and $ 3,000 for all other children under 17).
• Child and dependent care credit ($ 3,000 to $ 8,000 for one child, and $ 6,000 to $ 16,000 for two or more).
• The First Time Homebuyer Credit would be reintroduced as a refundable credit and advance of up to $ 15,000, and
• A new caregiver loan provides $ 5,000 for informal long-term caregivers.

Changes in the tax on gifts and inheritance

The changes in the gift and inheritance tax are significant. The Biden plan removes the foundation improvement rules that currently apply to inherited assets and reduces the exclusion amounts from $ 11.58 million to $ 5.79 million. This will create an effective double tax on the inheritance. The first tax is the fair market value of the assets in relation to the foreclosure and the second when the beneficiaries sell inherited assets and have to recognize the gain from the asset that would have already been taxed by inheritance tax. If you are thinking about estate planning and gift transfers, you may want to do it before December 31, 2020.

Uniform Gift Transfers and Inheritance Tax

• Acceleration of transfers under the uniform provisions on transfers of wealth taxes and transfers of wealth taxes may be appropriate. For a married couple who leave the property to their children, the tax effect could be up to 5,000,000. Luckily, you don’t have to die to take advantage of these changes:
• Expedited gifts can be accomplished with many types of trusts.
• Accelerated donations can be achieved with the transfer of shares in family partnerships.

If Biden is elected, Traditional Tax Strategies may not work

• Defer or accelerate revenue
• High-income taxpayers are more likely to want to accelerate earnings, as tax tabs may be higher next year. Low to medium income will want to be more traditional and defer income.
• Pay or defer tax deductible expenses
• Low- to mid-earners will want to pay them back in 2020. High-income taxpayers will want to defer some deductible expenses to the next year under the assumption that tax rates will go up and they will receive a greater benefit using them next year.

If Trump is victorious, traditional tax planning methods would be the right strategies to follow. Let’s see below what the fiscal strategies may be for the end of 2020.

• Postpone income.
• Accelerate expenses.
• Retirement plan contributions maximum.
• Take advantage of asset spending choices (ie, bond depreciation, Section 179, etc.) as much as possible for any planned capital improvements.

Business tax provisions

Let’s see below what may be the tax strategies for the end of 2020 for companies.

Transfer of tax losses to five years for losses generated in fiscal years 2018, 2019 and 2020

Net losses from fiscal years 2018, 2019, and 2020 can now be recovered from five past fiscal years and the CARES Act suspends, that is, removes the 80% limitation on tax revenue through fiscal year 2020. This is an opportunity unique to ensure permanent tax savings through the use of losses against income generated in previous years at higher tax rates.

In 2015, corporations may have been subject to a tax rate of 35% (individuals 39.6%), so returning a net loss would be much more beneficial than a carry-over to 2021 with a tax rate of 21% (37% for individuals). In this case, consider ways to speed up deductions and defer income to increase the NOL available to be carried back.

Retroactive Reimbursement for Bonus Depreciation

The CARES Act extends bonus depreciation to qualified improvement assets that applies to almost any interior improvement in a building that is owned or leased. It is retroactive, allowing you to fully deduct Qualified Improvement Property (QIP) through January 1, 2018.

If you filed the 2018 and 2019 returns before the exchange law, you can choose whether to reflect the additional retroactive deduction entirely in 2020 with a change in accounting method, or modify the 2018 and 2019 returns to apply the bonus depreciation. for QIP in each of those previous years.

Under the Tax Cuts and Jobs Act (TJCA, Trump’s original tax cuts), these types of improvements were supposed to have a 15-year life and were eligible for 100% bond depreciation. A wording error eliminated both benefits. The CARES Act retroactively corrects this issue for upgrades purchased as of January 1, 2018.

Retroactive correction presents an opportunity for many taxpayers to accelerate depreciation, either by filing a Form 3115, Request for Change in Accounting Method, or, in some cases, by filing an amended tax return.

Qualified improvement property is now eligible for 100% depreciation, retroactive to property acquired and placed in service after 2017.

Other changes

• The 100% depreciation runs through 2022. The depreciation will be available for used property as well as new property. The 100% deduction is allowed for qualifying goods purchased and placed in service after September 27, 2017, and before January 1, 2023.
• The item 179 expense is $ 1,040,000 and the phase-out deduction is $ 2,259,000.
• Businesses with average annual gross income of $ 25 million or less in the preceding three fiscal years are eligible to use the cash flow method of accounting.

Waiver of Required Minimum Distributions (RMD) for 2020

The CARES Act waives the RMD rules for certain defined contribution plans and IRAs during 2020. The exemption does not apply to defined benefit plans (ie, pensions).

Charitable deduction above the line

The CARES Act created a deduction above the line of up to $ 300 for cash contributions from non-itemizing taxpayers. If you want to take advantage of this provision, be sure to donate before the end of the year.

Uncertainties Associated With Payroll Protection Program (PPP) Loan Recipients

A significant number of small and medium-sized businesses received Payroll Protection Loans. Currently there are applications for waivers that must be submitted within ten months from the end of the chosen covered period (8 or 24 weeks). Some recipients will qualify for a full pardon and some will not. This contingency and the initial decision by the Treasury Department on the expenditures that will qualify the recipient for forgiveness has created significant uncertainty.

This year or next?

• Many borrowers will not know until 2021 how much of their loan will be forgiven. So there are several uncertainties:
• Will forgiveness create revenue in 2020 when revenue is received and expenses are incurred?
• Alternatively, will forgiveness create tax revenue in 2021, when the borrower receives confirmation that their loan is forgiven?
• How is spending used to qualify for forgiveness treated in the meantime?

For federal purposes, PPP loan forgiveness may be excluded from gross income by a beneficiary eligible under the CARES Act.

However, the IRS issued a notice in April 2020 stating that expenses associated with tax-free income are not deductible. This guidance was consistent with the historical IRS guidance regarding non-tax income and related expenses, but has the net effect of essentially reversing the tax-free benefit of the exclusion on loan forgiveness.

Per the IRS, allowing businesses to deduct these expenses would result in business owners receiving a “double” benefit. This goes against the intention of Congress which was for the loan forgiveness to be tax free. The IRS position reverses that position and eliminates any profit, much less double profit. If a business has $ 100,000 of PPP loans forgiven and excluded from its income, but is then required to add $ 100,000 of accrued business expenses, the result is the same as if the loan forgiveness were fully taxable.

While the IRS guidance does not appear to align with the express intent of Congress, there has been no law or ruling to correct this obvious mistake despite discussion in Congress about fixing it.

What to do in the meantime?

• We hope that a resolution will be issued in favor of the borrowers before the due date to file their tax return for 2020.
• We recommend that all expenses used to qualify a borrower for loan forgiveness be classified as a separate range of accounts or in a separate department. You must track the expenses used in your PPP Loan Forgiveness Application to achieve loan forgiveness.

With respect to tax payments and filing, we believe that most will extend their returns in the hope of clarification. The significance of the difference can be enormous, for example, if the loan was for $ 2,500,000. For year-end tax planning, we have to adhere to the current IRS position that PPP loan forgiveness expenses are not deductible and plan your tax returns and payments accordingly in order to avoid potential penalties and interest. . If Congress or the President corrects the IRS, you will receive a refund instead of a penalty bill.

Estimated tax payments

Continuing with fiscal strategies for the end of 2020, all this uncertainty affects tax planning, in particular the estimated tax payments and extension for 2020.

In order to save cash, many have chosen not to take advantage of the safe harbor of payment ES of 110% of the previous year’s tax and are paying based on projected tax income for the current year.

With a quarterly estimated tax payment remaining this tax year, you will need to plan for this to make the final payment. However, no matter what you decide for estimates, you will ultimately have a decision to make at the time of extension.

Important elements of the tax for individuals

Continuing with tax strategies for the end of 2020, the stimulus payment or recovery refund is an upfront refundable tax credit on 2020 taxes. This means you can keep all of your money with no taxes owed on it, regardless of how much you owe. (or don’t owe) for 2020. If your income is less in 2020 than 2019, any additional credits you are eligible for will be refunded or reduce your tax liability when you file your 2020 tax return.

• The 2018, 2019 and 2020 net operating losses can be carried back to obtain refunds of taxes paid in the previous five years. This is a change from a previous law that repealed the two-year carry-over of net operating losses.
• Highest standard deduction:
  • Married filing jointly: $ 24,800
  • Married filing separately: $ 12,400
  • Head of household: $ 18,650
  • Single: $ 12,400

• Changes to the retirement account:
  • The contribution limit for 401 (k) plans is $ 19,500 with a contribution of $ 6,500 for taxpayers age 50 and over.
  • The starting age for minimum distributions (RMD) require changes from 70 1/2 to 72. This only applies to account owners who will turn 70 and 2 after 2019.
  • As of 2020, inherited IRAs generally need to be withdrawn within 10 years. There are exceptions for surviving spouses, minor children, and beneficiaries who are no more than 10 years younger than the account owner. Accounts inherited from people who died before 2020 do not affect this change.
  • The IRA contribution limits remain unchanged at $ 6,000 plus a $ 1,000 contribution for people age 50 and older.
• Higher contribution limits for Health Savings Accounts:
  • One-Only Coverage: $ 3,550
  • Family coverage $ 7,100
    • Higher limit on Social Security payroll taxes:
    • The maximum amount that is subject to Social Security payroll taxes went up to $ 137,700 for 2020.
• Exclusion of income earned abroad:

For taxpayers working abroad, the foreign earned income exclusion increased to $107,600 for 2020.

Significant elements of business tax

Let’s see below what the tax strategies for companies may be for the end of 2020.

• For 2020, the corporate tax rate remains a flat rate of 21%.
• The standard mileage rate for business miles is 57.5 cents per mile.
• The 100% bond depreciation runs through 2022. The bonus depreciation will be available for used property as well as new property. The 100% deduction is allowed for qualifying assets purchased and placed in service after September 27, 2017, and before January 1, 2023.
• The section 179 deduction is $ 1,040,000 and the phase-out amount is $ 2,259,000.
• Businesses with average annual gross revenues of $ 25 million or less in the preceding three fiscal years are eligible to use the cash-based method of accounting.
• Similar exchanges are limited to exchanges of real estate that are not primarily held for sale.
• A deduction for an activity generally considered entertainment, amusement, or recreation is not allowed.
• Generally, companies can deduct 50% of business meals. The 50% limitation will extend to meals that meet the requirements for de minimis fringe benefits or for the convenience of the employer (100% previously deductible). Such amounts paid after December 31, 2025 will not be deductible.
• For transparent entities (partnership, S corporation, or sole proprietorship), individuals can deduct 20% of qualified business income. Generally, the 20% deduction is limited to the greater of 50% of the W-2 wages paid with respect to the business or the sum of 25% of the W-2 wages and 2.5% of the unadjusted basis of assets newly acquired qualified. However, the salary limitation does not apply to taxpayers below the deduction amount of $ 163,300 ($ 326,600 in the case of a joint return). Exchanges or specific service businesses (accounting, health, law, consulting, athletics, financial services) will be excluded from the definition of a qualifying business for taxpayers with tax revenues greater than $ 163,300 ($ 326,600 for a joint return). The deduction applies to partnerships and S corporations at the partner or shareholder level.

Impact of the Managed Services Organization (MSO)

The Tax Reduction and Employment Act of 2017 (TCJA) lowered corporate tax rates from 35% to 21% and created a substantial differential in corporate rates compared to the top individual marginal rate of 37%. Many taxpayers chose to take advantage of this tax differential by either optimizing either transferring their business activities to a C corporation or restructuring the tax revenues of the higher individual tiers. By using a company management entity (MSO) and paying a structured management fee as reasonable compensation to taxpayers, MSOs have been able to reduce the tax on restructured earnings by almost 50%. This strategy is still available for 2020.

Does this strategy change under a Biden presidency?

Joe Biden has stated that he will increase corporate tax rates from 21% to 28%; however, it would still be a significant differential. With FICA’s income and tax rates rising to more than 50 percent for individuals earning more than $ 400,000, the savings would be even greater. The Biden tax plan will keep the C Corporation MSO tax arbitration viable for the next several years.

The impact of the MSO fiscal year

Continuing with tax strategies for the end of 2020, many C Corporations structured as MSOs are established with a different fiscal year end from the related operating company. Generally, a September end of the year is set for the MSO. Accordingly, a September year-end MSO will have a 2019 fiscal year beginning on October 1, 2019, and ending on September 30, 2020. Its 2020 fiscal year will be October 1, 2020, ending on October 30. September 2021.

The operating company is usually an S Corporation, Association or ignored entity with a calendar year end. This structure between entities related to the same fiscal year and a staggered fiscal year provides significant opportunities for savings and or tax deferral by various means.

IRS regulations allow the prepayment of up to twelve months of expenses for a particular service.

Consequently, this structure provides the ability to defer up to fourteen months of income by paying twelve months’ worth of management fees in October and another two months in December. The structure also provides planning flexibility in measuring the level of management fees in times of changing profitability.

Cost segregation studies

Cost segregation studies (CSS) allow you to accelerate the depreciation of commercial real estate improvements. For businesses and individuals who own commercial real estate, multi-family homes, or have tenant improvements greater than $ 300,000, a cost segregation study could significantly lower their tax revenue in 2020. Cost segregation studies free up capital and cash flow by accelerating the depreciation of personal property associated with commercial real estate.

For buildings and improvements to be eligible they must be:

• In service since 1987
• Currently they depreciate in 27.5 or 39 years
• $ 300,000 + in capitalized costs
• Has been acquired, built, expanded or remodeled
• The owner of the property must be a taxpaying entity.

Research and Development Tax Credits

On the same topic about tax strategies for the end of 2020, the Research and Development (R&D) Tax Credit is a source of short-term cash, as well as a possible reduction to current years and future federal and state tax liabilities. . The R&D Tax Credit rewards companies for conducting research and development in the United States. The credit is intended as an incentive to innovate new technology here in the United States rather than abroad. Qualified areas are much more than most business owners realize.

Qualified activities include concept development, design, engineering, software development, experimentation with new materials, design of tools, accessories, and prototyping and testing of products and manufacturing processes. Most businesses receive a tax credit equal to 4-7% of total qualified expenses.

The latest tax reform packages:

• Made the tax credit permanent
• Upgrade included for startups and other small businesses
• Eliminated the alternative minimum corporate tax (AMT)
• Made favorable adjustments to individual AMT calculation

If you are involved in any of these activities, you should consider a Research and Development Tax Credit assessment to determine if you qualify for these tax refunds.

Qualified Retirement Plans

Continuing with the tax strategies for the end of 2020, Retirement Plans Qualified as 401 (k), Profit Sharing and Pension Plans have the ability to generate tax deductions for the current year even though they may not be funded until next year. . QRPs allow you to take a deduction in the current year for the contributions you make up to the time you file your tax return, with extensions (generally 9/15 or 10/15 for calendar year-end businesses).

Putting these plans in place in 2020 could allow you to generate a tax loss by funding earnings contributions in 2021. This is another method of reducing current year tax revenue.

Debt restructuring

Concluding with the tax strategies for the end of 2020, with the difference in tax rates between high earners and C Corporations we believe it is time to reconsider how you have your liabilities. Remember that debt is paid in after-tax dollars. As such, the lower the tax bracket, the less profit is required to provide an after-tax dollar. Under current law you have to earn $ 1.69 in a 40% tax environment to pay your taxes and have a remaining $ 1 after taxes. In a 21% C corporate tax environment, you only have to earn $ 1.27 to pay a 21% tax and have the same $ 1 left after taxes to pay the principle on debt. That’s a savings of $ 0.42 ($ 1.69 – $ 1.27) per dollar of principal due (that is, saving you $ 420,000 per $ 1,000,000 of debt). With interest rates at near-record lows, it’s a great time to restructure debt, free up cash flow, and lower the cost of repayment.

MABE INTERNATIONAL ADVISORS, INC

We are a tax accounting and financial and business advisory firm based in Houston, TX, with more than 25 years of experience. Our goal is to support our national and international clients to achieve their financial, operational and accounting objectives.

We offer a wide variety of tax planning services for both companies and individuals. Tax planning can save you time and money.

Rodolfo Maya
CEO & Founder
MABE International Advisors, Inc.
Tel. + 1-281-741-3691

MABE International Advisors, Inc.

11511 Katy Fwy Suite # 640
Houston, TX 77079
Tel. 281-741-3691
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