October 2020 Newsletter

October 2020

Tax News & Updates

In this issue:

Tax Corner: ADA Tax Credits – A Client Case Study
NOL Carryback Period Extended
Did You Know?
Tax Facts
Good Reads
Important Dates

Gearing up for year-end and prepping for 2020 taxes

Fall is officially here, and for our team, that means Fall Tax Projections, PPP loan forgiveness applications for certain clients, and gearing up for our clients’ year-end closing.

Traditionally, the last quarter of the year is the time to review financial statements, such as profit and loss (P&L) statements and balance sheets, and incorporate the data into tax projections. This gives us time to take advantage of the remaining months to put into action any tax-savings or deferral plans. We also do a cursory scan of our client’s books identifying missing W-9 forms from contractors or vendors that were paid $600 or more during the calendar year.

And it’s never too soon to start thinking about 2020 taxes! Below, you’ll find information about a little-known ADA tax credit and a change to the carryback time period for Net Operating Losses that could save you money come tax time.

As always, if you have any questions, please don’t hesitate to reach out to us.

Susan Clarke & The CPA Team

Tax Corner

ADA Tax Credits – A Client Case Study

The Americans with Disabilities Act of 1990 just celebrated its 30^th Anniversary.

This landmark legislation paved the way for decades of incremental changes to the way buildings, businesses and laws accommodate people with a wide variety of disabilities.

As technology and business evolved, so did the applicability of the ADA.

To assist businesses with the cost of making access improvements to comply with the ADA, Section 44 of the IRS Code allows a tax credit for small businesses and Section 190 allows a tax deduction for all businesses.

(NOTE: A tax credit is subtracted from your tax liability after you calculate your taxes, while a tax deduction is subtracted from your total income before taxes, to establish your taxable income.)

About the Small Business Credit

For Small Businesses with total revenues of $1,000,000 or less in the previous tax year, or 30 or fewer full-time employees
The IRS tax credit can cover 50% of the eligible access expenditures up to $10,250
The maximum tax credit is $5,000 (since there is no credit for the first $250 of expenditures)
The tax credit can be used to offset the cost of undertaking barrier removal and alterations to improve accessibility; providing accessible formats such as Braille, large print and audio tape; making available a sign language interpreter or a reader for customers or employees, and for purchasing certain adaptive equipment.

About the Tax Deduction

Available to all businesses
Maximum deduction of $15,000 per year
The tax deduction can be claimed for expenses incurred in removal of physical, structural, and transportation barriers (Ex: widening doors, building ramps, modifying vehicles).

Small businesses can use these incentives in combination if the expenditures incurred qualify under both Section 44 and Section 190. (Read more here: ADA Factsheet and Quicktips for Tax)

Case Study: Small Business ADA Tax Credit in Practice

InTouch & Motion is a CPA client that provides psychotherapy, dance/movement therapy, art therapy, hypnotherapy, past life regression therapy, and intuitive wellness services in Chicago. One of their on-staff therapists works with the Deaf community, and they began exploring options to address the cost of interpreters, should they be needed in the care of their patients.

The therapist came across an article about mitigating additional costs to deliver therapy, and it mentioned a complexity code that could be billed to insurance and an ADA tax credit for small businesses. The therapist passed the article to the owner of the practice, who passed it on to the CPA team. We took a look at the facts and requirements and determined that since Insurance was NOT reimbursing for those specific costs that the tax credit up to $5000 could be taken!

KEY Takeaway: If you read something in a trade publication or related to your industry niche that you feel is applicable to your taxes, don’t be afraid to send it to us and let us investigate. It could save you money down the road!

Carryback Period for Net Operating Losses (NOLs) Extended to 5 Years

(and what that means for you…)

A Net Operating Loss (NOL) happens when a taxpayer has more expenses than revenue in a tax period. NOLs can actually be useful since they allow an offset against income in a future or prior tax period to reduce taxes.

Recent COVID-related legislation (CARES Act) changed NOL treatment and opened the door for taxpayers with NOLs to get tax refunds. NOLs and how they can be utilized has changed twice since the Tax Cuts and Jobs Act (TCJA) of 2017, so let’s take a look at what the migration has been.

Pre TCJA

2017 and prior

2 Year Carryback

20 Year Carryforward

No Income Limitation

No Excess Business Loss

POST TCJA (2018)

2018 & 2019

Eliminate Carryback

Indefinite Carryforward

80% Income Limitation

$250,000 (S) $500,000 (MFJ)

Allowable Pass-through loss

COVID-CARES Act

2018-2020

5 Year Carryback

Indefinite Carryforward

No Income Limitation

Example

Year

2014

2015

2016

2017

2018

2019 (NOL year)

2020

2021

Carryback/Carryover

$42,000

40,000

37,000

31,500

22,500

12,700

4,000

Unused Loss

$40,000

37,000

31,500

22,500

12,700

4,000

-0-

In the example above, there would be a refund of taxes for each of the carryback years.

The IRS offers 2 methods to claim NOLs:

Form 1045 – Application for Tentative Refund (which is used when you are carrying back an NOL)
Amend each carryback year to recognize the NOL and recompute the tax liability.

The 1045 is our preferred method, but it needs to be filed prior to the year-end. For 2019 returns filed in 2020 that generate an NOL, form 1045 must be filed on or before 12/31/2020. These are paper-filed forms, they cannot be electronically filed.

When carryback of NOL is permitted under tax law, the taxpayer must carry it back before carrying forward. But what if you don’t want to carryback the NOL? You can make an election on the return year which generated the NOL to waive the carryback. That means for 2019 returns on extension being filed in the next few weeks, the taxpayer needs to determine if they want to “forgo” the NOL carryback and make the election. The election cannot be reversed either!

These rules are complex. Reach out to our CPA team to understand what these NOL changes mean for your tax planning and how to use them to maximize tax savings and increase cashflow.

Questions? Email Us

Every November, the IRS shuts down their e-filing system

Every November, generally between the 3rd and 4th week, the IRS shuts down the e-filing system for 1040 returns in order to prepare for the upcoming tax year. They also close e-filing for business returns at the end of December for the same purpose. IRS will then re-open e-filing in January.

Tax Withholding started because the U.S. needed a steady flow of cash to fund the war effort

In the 1940s, the government passed the Current Tax Payment Act of 1943, which required that companies withhold income taxes from employees’ paychecks and make ongoing payments on employees’ behalf. Before this (from 1916 to 1943), Americans paid income taxes quarterly or annually.