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Year-end tax uncertainties
The results of the recent elections make one thing clear, we have a lack of clarity regarding tax policy and how to proceed with traditional year-end tax planning.
Regardless of the outcome of the runoff in Georgia, with respect to the election of two additional senators, it is questionable that even if both Democratic candidates win that President-elect Biden will be able to accomplish substantial changes in the 2021 tax code.
These uncertainties regarding what changes will occur in 2021 make planning for year-end 2020 difficult.
A review of the Biden's proposed tax changes include:
- a raise in individual income tax rates for taxpayers who have taxable income of more than $400,000;
- changes in the corporate income tax rate from 21% to 28%, and possibly eliminating Section 199A deductions for pass-through entities that benefit owners of partnerships, S corporations and sole proprietors; and
- changes to the estate and gift tax law such as substantial reductions in the uniform credit which currently for a married couple is $23.4 million as of Jan, 1, 2021, to possibly a high of $7 million; and eliminating the step-up in basis to fair market value for assets transferred on death.
Paycheck Protection Program loan
More than five million businesses were granted loans under the Paycheck Protection Program (PPP) loan program which provided that the loans may be forgiven if certain conditions were satisfied, and the forgiveness would not be deemed cancellation of debt income.
On May 2, 2020, the IRS released Notice 2020-32 which provided that no deduction will be allowed for otherwise eligible expenses that were paid for with the PPP loan in the event the PPP loan was forgiven. This revenue notice has been the subject of criticism because it seems inconsistent with the legislation granting the PPP loan.
On Nov. 18, 2020, the IRS doubled-down by issuing Revenue Ruling 2020-27 which provides that the deduction for these otherwise eligible expenses will not be allowed in the year of payment in the event that the borrower reasonably expects the PPP loan forgiveness regardless of when the actual forgiveness is granted or when an application for forgiveness has been filed.
With a new administration, this PPP loan forgiveness (allowance of otherwise eligible expenses), could be addressed in a subsequent stimulus package should Congress approve one; however, this may not occur until 2021.
Taxpayers of pass-through entities who anticipate receiving forgiveness of PPP loans should review their 2020 estimated tax payments to avoid underpayment of tax penalties.
All of these uncertainties make this year-end tax planning more guesswork than has been experienced in past years.
If you have questions or need advice related to the Small Business Administration's PPP program or year-end tax concerns, Chuhak & Tecson attorneys are ready to assist you.
Client alert authored by: Edwin I. Josephson (312 855 4349), Principal.
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.