Tax Planning for Businesses in 2020

Strategies to Consider amid COVID-19 & After the Election

November 11, 2020

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What does the current environment mean for your business’ …

Tax Rate Cash Flow Choice of Entity

M&A Strategy

Exit Strategy

› An intentional process of reviewing your tax & financial matters to

• Take advantage of benefits within the tax law• Help reduce your tax burden• Review changes & updates• Evaluate & set goals

What Is Year-End Tax Planning?

Current Corporate Tax Rate› Flat federal rate of 21%

› No federal alternative minimum tax

› Various state & local tax rates

Your Tax Rate

Current Pass-Through Tax Rates› Seven brackets with top rate of 37%*^

› Qualified business income taxed at top rate of 29.6% subject to limitations*^

› Capital gains & qualified dividends taxed at top rate of 20%*

› Alternative minimum tax at top rate of 28%* applies above exemption amount

Your Tax Rate

*Plus 3.8% net investment income tax on unearned income when modified gross income exceeds $200,000 for single filers ($250,000 married filing jointly (MFJ))^Expires after December 31, 2025, except amounts would continue to be indexed for inflation using chained measurement of the consumer price index where applicable

Future Rate Proposals› Corporate tax rate

› Alternative minimum tax

› Pass-through tax rates

› Capital gains rate

Your Tax Rate

TIMELINE OF THE TCJA PROVISIONS

Expire Employer credit for paid

family & medical leave Threshold for medical &

dental expenses raises to 10% of AGI

Favorable treatment for S corporation conversions to C corporations

Effective Majority of TCJA

provisions went into effect for tax years beginning after December 31, 2017

Effective Repeal of

deduction & income inclusion for alimony paid

ACA individual mandate reduced to zero

2018 2019 2022

Expire R&E expenditures

capitalized & amortized over five-year period

Depreciation, amortization, & depletion removed from adjusted taxable income calculation for business interest limitation

Bonus depreciation begins to phase-down

2026

Expire Majority of

individual TCJA provisions, including rates, QBI deduction, & increased lifetime exemption

2023

Expire Bonus

depreciation begins to phase-down

Payroll-Related Relief › Payroll tax credits for emergency paid sick

leave & expanded FMLA*

› Employee retention credit

› Deferral of employer’s portion of Social Security tax & self-employment taxes

Your Cash Flow

* Applies to leave taken between April 1, 2020–December 31, 2020

TCJA-Related Relief› Allowed net operating loss carrybacks*

› Removed excess business loss limitation*

› Relaxed limitation on business interest expense*

› Fixed 15-year life for qualified improvement property

Your Cash Flow

* For 2018, 2019, & 2020

Qualified Improvement Property

› CARES Act fixed TCJA glitch making QIP 15-year property & eligible for 100% bonus depreciation

› Leaving 2018 & 2019 QIP unchanged as 39-year property is impermissible accounting method

› May amend previously filed 2019 tax return with accounting method change rather than waiting for 2020 tax return or having to amend two tax returns

› Limited business interest expense to sum of business interest expense, floor plan financing interest & 30% of adjusted taxable income (ATI)*

› After 2021, limit is modified to disallow add back for depletion, depreciation & amortization

Business Interest Expense LimitationTCJA CARES Act

› Limitation increased to 50% of ATI for 2019 & 2020 tax years (2020 for partnerships)

› Businesses may elect to use 2019 ATI to calculate limitation for 2020

* Exceptions available for small taxpayers, regulated public utility businesses, & certain real property & farming businesses

› Limits aggregate deductions attributable to trades or businesses over the aggregate gross income/gain to $255,000 for single filers ($510,000 MFJ) in 2019

› Excess losses treated as NOL

Excess Business Loss LimitationTCJA CARES Act

› Repeals limitation for tax years beginning after December 31, 2017, & before January 1, 2021, i.e., 2018 through 2020

› Limits deduction to 80% of taxable income for losses arising in tax years beginning after December 31, 2017

› May generally not be carried back

› Carried forward indefinitely

Net Operating Loss (NOL)TCJA CARES Act

› Suspends 80% limitation for tax years beginning after December 31, 2017, & before January 1, 2021, i.e., 2018 through 2020

› NOLs generated during 2018 through 2020 may be carried back up to five tax years

COVID-19-Related Relief› Small Business Association (SBA)

• Paycheck Protection Program (PPP)• Economic Injury Disaster Loans (EIDL)

› Treasury Main Street Facilities• Main Street Business Lending Program• Municipal Liquidity Facility

Your Cash Flow

Factors to Consider1) Effective tax rates

2) Future tax rates

3) Accounting methods

4) Compensation & benefits

5) Ownership & succession

Your Choice of Entity

Corporations Pass-ThroughsNumber of tax brackets One, flat rate Seven brackets for

individuals (four for trusts/estates)

Top tax rate 21% + 23.8% on qualified dividends 37% + 3.8% net investment income tax

Alternative minimum tax None 28% (after exemption subject to phaseout)

Other tax Accumulated earnings tax (20%) Tax on undistributed personal holding

company income (20%)

Self-employment tax (15.3%) Built-in gains tax

Other rate considerations Full/partial gain exclusion on qualified small business stock

QBI deduction (20%) Limitations on SALT

deduction Limitations on losses

Current Business Tax Rates Compared

Top Proposed Business Tax Rates

Type of Entity Current Law Trump Proposal Biden ProposalCorporation 39.8%

(21% + 0.79 * 23.8%) 39.04%

(20% + 0.80 * 23.8%) 59.25%

(28% + 0.72 * 43.4%*)

Pass-throughWith QBI 33.4% through 2025

(37% * 80% + 3.8%) 33.4% beyond 2025

(37% * 80% + 3.8%) 43.4%(39.6% + 3.8%)Without QBI 40.8% through 2025

(37% + 3.8%) 40.8% beyond 2025

(37% + 3.8%)

* Assumes change in preferential rate on qualified dividends

Factors to Consider› Current uncertain economic outlook &

increased market volatility

› TCJA changes to business interest expense limitation in 2022 make leverage less attractive

Your M&A Strategy

Questions to Consider› What’s your timeline

› What will the transition look like?

› How will the business be affected before & after the transition?

› Are there any management succession issues?

› How will the transition contribute to your personal financial goals & estate plan?

Your Exit Strategy

“Perfect” Planning Environment› Historically low interest rates

› Down economy & depressed valuations

› Increased lifetime exemption available under TCJA through 2025

› Possibility of future tax law changes

Your Exit Strategy

Steps to Simplify Year-End Tax Planning1) Review your current tax situation

2) Consider changes to your tax situation

3) Evaluate effect of tax developments

4) Assess timing of income & deductions

5) Revisit your estate plan

Your Strategy

Strategies to Consider› CARES Act-related

• Plan for losses • Explore or revisit cash flow-related

relief options• Plan charitable contributions

Your Strategy

Strategies to Consider› Election-related

• Accelerate income & defer deductions• Evaluate timing of charitable

contributions• Consider choice of entity

Your Strategy

Strategies to Consider› Wealth transfer-related

• Revisit estate plan• Implement wealth transfer strategies• Review tax basis planning strategies• Consider charitable trusts

Your Strategy

What does the current environment mean for your business’ …

Tax Rate Cash Flow Choice of Entity

M&A Strategy

Exit Strategy

Questions?

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Thank You!The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered