Brenda Colburn Jemmott, CPA, Stockholder and Oakland Office Head
Brenda Colburn JemmottCPA / Partner / Co-Managing Director of Taxview bio

Kelly Creed, CPA, Tax Stockholder in the Oakland office.
Kelly CreedCPA / Tax Partner / Co-Managing Director of Taxview bio

Ready or Not -- It's Tax Planning Season


RINA Alert --  November 18, 2020 | Volume 18, Issue 33 

The holidays are coming and that means it is time to start thinking about year-end moves to minimize your taxes.  Because this has truly been a year like no other, the traditional year-end tax planning strategies may not make sense which means year-end tax planning is more important than ever.
The right tax strategy can help you navigate this time of historic disruption and put you on the right track as the new year begins.
With that in mind, we have put together, the following list of tax considerations for year-end planning for both individuals and businesses.

Individual Tax Planning Considerations

  • Tax rate comparison – 2020 vs. 2021Taxpayer with a crystal ball

    It is not known if the tax rates will increase in 2021, but there is a possibility of it happening to those in the highest bracket. So, you may want to think about whether you should:
    • Prepay tax deductible expenses or delay payment until 2021
    • Receive and recognize income into 2020 or push it into 2021
    • Accelerate or delay your capital gains (or losses)

      And, if you are self-employed, you may want to think about deferring your self-employment taxes to 2021 or 2022.  The CARES Act allows for those that didn't take a PPP loan, to defer their 2020 payroll taxes to 2021 and 2022.
  • Qualified Opportunity Zones (QOZ)  

    If you’re worried about capital gains, QOZs may provide an excellent tax-free investment. QOZs are one of the most powerful incentives ever offered by Congress for investing in a specific geographic area. If a qualified investment is made, not only can you defer paying tax on capital gains invested in an opportunity zone until as late as 2026, and you only recognize 90% of the gain if you hold the investment for five years. Additionally, if you hold the investment for 10 years and satisfy the rules, you pay no tax on the appreciation of the opportunity zone investment itself.

    There are more than 8,000 opportunity zones throughout the United States, and many types of investment, development and business activities can qualify.  
  • 4th Quarter Estimate Computation

    Normally, a 4th quarter tax estimate computation is done using safe-harbor estimates, however, due to this year’s peculiarities, you should check to see if you need to increase or decrease your estimates.

    Safe Harbor, as it applies to estimated taxes, means that as long as the amount of withholding, credits and estimated tax paid in the current year is at least as much as 110% of prior year’s tax liability, there will be no federal estimated tax interest or penalties.

    However, for California, the Franchise Tax Board modifies the use of the safe harbor rule based on a taxpayer’s adjusted gross income (AGI).
    • Taxpayers with AGI equal to or greater than $1,000,000 must figure estimated tax based on their current year income. In other words, the Safe Harbor rule may not be relied upon for taxpayers with AGI over $1,000,000 for California.

      Also, it is important to note that California’s estimated tax payment rule differs from the Federal rule. Rather than being required to pay 25% of estimated tax each quarter, to avoid an estimated tax penalty, taxpayers must pay at least:
      • First quarter (April 15)—30%
      • Second quarter (June 15)—40%
      • Third quarter (September 15)—0%
      • Fourth quarter (January 15)—30%

      If you owe more taxes than you estimated, the additional tax will be due April 15, 2021.
  • Required Minimum Distribution (RMD)

    Retired CoupleDid you take a RMD or pay it back? As we mentioned in our alert on August 14th, the CARES Act allows any taxpayer with an RMD due in 2020 from a defined-contribution retirement plan to skip those RMDs in 2020.

    If you took a RMD in 2020 you had until August 31, 2020 to decide if you were going to roll those funds back into a retirement account. In addition, you also had the option to repay the distribution to the IRA by August 31, 2020.

    If you took the RMD was there any withholding taken out?
  • Impact of unemployment compensation

    The pandemic has caused millions to file for unemployment and under the CARES Act, Individuals receiving state unemployment benefits had access to an additional $600 per week in Federal Pandemic Unemployment Compensation benefits. It’s important to recognize that unemployment benefits, including the $600 boost, are considered taxable income for federal income tax purposes.  

    While you don’t have to pay Social Security or Medicare taxes while receiving unemployment benefits, you do have to pay Federal income taxes. California does not tax unemployment benefits at the state level.
  • Charitable contributions

    Our September 15th alert, highlighted the CARES Act changes to the rules for charitable income tax deductions for individuals. The Act:
    • Increases the Adjusted Gross Income (AGI) Limitation to 100% in 2020 for Cash Gifts
    • Includes a $300 Above-the-Line Charitable Income Deduction for non-itemizers – this deduction is for 2020 only.

      One thing to ponder is whether to stagger your contributions every other year so that you can potentially benefit by itemizing deductions the year you contribute. If you give your 2020 contributions to a charity in January and then prepay your 2021 gifts in December, your total donations may lift you above the standard deduction amount. In 2020 the standard deduction is $12,400 for single filers and married filing separately, $24,800 for married filing jointly and $18,650 for head of household.
  • Estate Tax Considerations

    Here are some estate planning thoughts that you might want to mull over before the end of the year:
    • Make gifts to use up some or all of your $11.58 million exemption. The IRS has already said that gifts in excess of a future reduced exemption amount will NOT be “clawed-back” for purposes of computing the estate tax on your estate.
    • Make gifts in excess of your $11.58 million exemption and pay a gift tax at a 40% rate. It may be better to remove the asset from your estate now and avoid future appreciation.
    • Consider property tax reassessment when selling or transferring property to family.
    • With interest rates at historical lows, make Applicable Federal Rates loans to family members and/or create Grantor retained annuity trusts.

Business Tax Planning Considerations

  • business owner planningPaycheck Protection Program (PPP)

    Currently, from a tax standpoint, PPP loans that are forgiven will not be included in taxable income. However, businesses cannot deduct any expenses paid with PPP loan funds that have been forgiven, therefore the amount forgiven is essentially taxable.  The IRS is expected to release direction soon on whether the amount forgiven will be taxable in 2020 vs.21. RINA will issue an alert as soon as the guidance is issued.

    The more important year-end planning consideration for PPP loans is forgiveness. While this is not necessarily related to tax planning, if you received a PPP loan, applying for loan forgiveness may be your most important year-end task.

    In California, the governor signed a bill providing that for tax years beginning on or after January 1, 2020, the loan amounts forgiven under the Paycheck Protection Program will not be included in gross income for individual and corporate state income tax purposes.

    Some businesses should apply for loan forgiveness as soon as they have spent the funds. Others may benefit from waiting for more clarification on forgiveness, either from their lender, from the U.S. Small Business Association (SBA) or from Congress.

    If you need help, please reach out to the RINA CARES team who can determine the best PPP forgiveness strategy for your business.
  • Taxpayer working from home in another stateNexus issues

    Do you have any employees working out of state?  Will you have new state filing requirements? Under normal circumstances, having an employee working in a state would likely establish nexus for sales tax, as well as income tax purposes. Some states have acknowledged the unprecedented circumstances that were largely out of employers' hands and extended an exception considering COVID-19.

    In September, the California Franchise Tax Board updated its COVID-19 FAQs for tax relief and assistance with nexus guidance for out-of-state corporations that previously had no connections with California but now have employees indefinitely teleworking in California under Governor Gavin Newsom's "stay at home" Executive Order N-33-20

    The FTB stated that an employee teleworking in the state due to the governor's stay at home order will not cause a corporation to exceed the protections of the Federal statute and instead, the nexus guidance treats the employee's presence protected activity under the Federal law for California purposes. Each state has provided its own guidance regarding nexus, so make sure that you understand your situation.
  • Consider the timing of payroll tax deduction - CORRECTION posted 12/28/20

    As originally enacted, the CARES Act prevented employers that received a Paycheck Protection Program (PPP) loan from deferring their 6.2% share of Social Security taxes for the rest of 2020 after receiving notification of loan forgiveness.

    However, the PPP Flexibility Act was enacted and made changes to the CARES Act to allow employers to continue to defer Social Security tax deposits after the PPP loan is forgiven, which greatly expands the amount of Social Security taxes PPP loan recipients are permitted to defer. Half of the deferred amount is due by Dec. 31, 2021, with the other half due by Dec. 31, 2022.

    For many businesses, it may be worth deferring. Please reach out to your RINA tax professional to consider if a payroll tax deferral is right for you.

  • Consider Accelerating Income or Tax Deductions

    Many small businesses are set up as sole proprietorships or "pass-through" entities, such as partnerships, S corporations and limited liability companies (LLCs) that are treated as partnerships for tax purposes.

    Income and deductions from pass-through entities are allocated to the owners based on their ownership percentage in their businesses. Your pro rata share of a pass-through entity's net income is taxed at your personal rates.

    Therefore, the traditional strategy of deferring income from these entities into next year, while accelerating deductible expenditures into this year, makes sense if you expect to be in the same or a lower tax bracket next year. However, if you expect to be in a higher tax bracket, take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until next year. Thus, more income will be taxed at this year's lower rate instead of next year's higher rate.
  • Maximize your Retirement Plan

    Taxpayers planning their savingsIf your business does not already have a retirement plan, it may be time to take the create one. Under the SECURE Act, small businesses will receive a tax credit to offset the costs of starting a 401(k) plan or SIMPLE IRA plan with auto-enrollment.

    This tax credit is on top of the start-up credit you’ll already receive, which is 50% of necessary eligible startup costs, up to a maximum of $500 per year for the first three years of the plan.

    Employers qualify to claim this credit if they had 100 or fewer employees who received at least $5,000 in compensation for the preceding year and at least one plan participant who was not a highly compensated employee, and if the same employees were not recently covered by similar plans.

    Other options to consider for tax incentives include, establishing a Defined Benefit Plan which provides a fixed, pre-established benefit to employees at retirement or a solo 401k designed for the self-employed individuals, or business owners with no full-time employees.

    Keep in mind, if you decide to move forward with a plan, you will need to set it up by the end of the year – December 31, 2020. Feel free to reach out the professionals at RINA Wealth who can answer all your questions.

Please note that the above tax planning considerations are just the beginning. There are many other important opportunities, and lawmakers are still considering further stimulus and economic recovery legislation. It is possible some of the benefits above will be enhanced and new benefits may be offered.
If you have any questions, please reach out to your RINA professional to discuss the specifics of your tax planning scenario before the end of the year. 

This content is prepared solely to provide general information to our clients and community.

This content does not constitute accounting, tax, or legal advice, nor is it intended to convey a thorough treatment of the subject matter.

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