What can business owners do to reduce their taxes? Some taxpayers need to make themselves aware of the various breaks applicable due to changes in the tax code. This year’s income tax credits will make filing anything but a simple tax return. Some of the benefits and tax write-offs available to businesses for 2020 are the result of the 2017 Tax Cuts and Jobs Act (TCJA) and some were created by the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). In addition, although the chance of any further tax or COVID-19 legislation seems slim, further changes may come.
In the meantime, consider the following five tips when filing your business income taxes:
1. Accelerated Alternative Minimum Tax (AMT) Refunds. The TCJA repealed the corporate AMT. It also allowed corporations to claim any unused AMT credits in tax years 2018–2021. The CARES Act accelerated this timeline. Accordingly, companies that file by December 31, 2020, can claim all remaining tax credits for 2018 and 2019.
2. Disaster Losses. The entire country was declared a disaster area because of the COVID-19 pandemic. This makes businesses eligible to fast track a refund for certain COVID-19-related losses, just like any person in the U.S. The losses must have occurred in 2020. The claim for a refund may be available if the business files a 2019 amended return.
3. Payroll Tax Deduction. Companies that elected to defer paying their standard deduction – a 6.2 percent share of payroll taxes for 2020 – are allowed to defer repaying this amount according to the following schedule: Half of the deferred amount must be repaid by December 31, 2021, and the remaining half must be paid by December 31, 2022. This itemized deduction can help companies with their cash flow, however, the current tax cannot be deducted if it is not paid. Consequently, with some exceptions, companies that defer paying payroll taxes in 2020 cannot take the deduction in that year.
4. Net Operating Loss (NOL) Carrybacks. The CARES Act allows businesses to use current losses against past income for immediate refunds on the upcoming tax return. As a result, NOLs arising in tax years beginning in 2018, 2019, and 2020 can be carried back five years for refunds against prior taxes. These deductions come with some restrictions, however, including when 2020 taxes are filed.
5. Bonus Depreciation. The CARES Act expanded the 100 percent bonus depreciation deduction on taxable income to apply to improvements to qualified improvement property dating from January 1, 2018.
These are summaries of what often are a series of complicated regulations for each commercial taxpayer. Companies must meet specific criteria for any of these tax benefit strategies to apply. You should work with a financial professional or tax expert when filing. Do not automatically assume that you do, or do not, qualify for any of these tax deductible provisions. Also, last-minute regulatory or legislative changes may add to or modify these provisions. For additional help deciphering these regulations, contact R&A.
About this Author
Nate is a trusted advisor for businesses and individuals, providing tax planning, compliance support, and accounting services. He also is certified as a Personal Financial Specialist which allows him to guide clients through the many challenges and phases of their career from start-up to retirement.