Tips for tax planning for small businesses

For the second year in a row, taxpayers face massive uncertainty. The COVID-19 emergency presents unique challenges and opportunities and has likely landed your clients in a position to lean on your professional expertise more than ever. In addition to the usual planning ideas, the recently enacted CARES Act offers several possible actions you can take to help your clients save tax and solve critical cash flow issues. Now is the perfect time to remind clients that you are thinking about them.

Consider the following strategies to minimize your clients’ tax bill for 2020.

Net Operating Losses (NOLs)

To assist small business owners who may have incurred losses as a result of the COVID-19 crisis, the CARES Act temporarily removed the TCJA limitation on NOLs. Because the new law is retroactive, your clients can now carry losses that originated in 2018 through 2020 back five years. This means you could carry a 2018 NOL back as far as 2013. Since tax rates were higher in 2017 and earlier years, carrying back an NOL should be much more beneficial than carrying that loss forward.

Excess Business Losses

The CARES Act also retroactively removed the limitation on Excess Business Losses (EBLs) that the TCJA implemented for 2018 through 2020. Under the TCJA, beginning in 2018, taxpayers were unable to deduct business losses from sole proprietorships or pass-through entities, such as partnerships and S corporations, if the combined loss exceeded $250,000 ($500,000 for married joint fliers). (Those amounts were adjusted annually for inflation after 2018.) The excess loss was converted to an NOL and carried forward, subject to certain limitations. Since this is a retroactive law change, if losses were limited in either 2018 or 2019 (if that return has already been filed), clients should strongly consider filing an amended return to generate a refund.

Business interest expense

The CARES Act relaxed the limitation on the deductibility of business interest expense. Under the TCJA, the deduction was generally limited to 30% of Adjusted Taxable Income (ATI). For 2019 and 2020, that limit is generally increased to 50% of ATI. Special rules apply to partnerships and their partners.

Better depreciation rules for real estate Qualified Improvement Property (QIP)

The CARES Act includes a technical correction to the TCJA that is retroactive to 2018. The new rule allows much faster depreciation for real estate QIP that is placed in service after 2017.

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