2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

This Year in Review

MISCELLANEOUS TAX DEVELOPMENTS Final Regulations and New Proposed Regulations

X Business interest is not retested at the pass-through entity owner level: The former proposed regulations suggested that owners of a pass-through entity that was exempt from the business interest limitation rules under the small business exception would need to retest interest expense of the entity to determine if a Section 163(j) limitation applies. The final regulation eliminates this issue. Executive Order to Defer Employee Social Security Taxes The enhanced unemployment benefits under the CARES Act expired on August 1. Due to the problems with getting a timely new stimulus bill, the President signed an Executive Order directing the Treasury Secretary to exercise his authority to defer payroll taxes for the period September 1, 2020, to December 31, 2020, for employees who earn up to $4,000 bi-weekly ($104,000 annually). This deferred amount will not be charged interest, penalty or additional assessments. The IRS issued additional guidance on this employee payroll tax deferral. Many employers have expressed concerns that this could cause a hardship for employees during this payback period. Others worry that this may create an incentive for employees to leave their jobs at the beginning of next year. In any event, it would be prudent for employers to notify employees of these consequences and document an agreement to recover the deferred taxes should the employee leave employment.

Final regulations and a new set of proposed regulations were issued by the IRS this year, dealing with the business interest expense limitation rules. These regulations are very extensive and cover many specialized areas and situations. The Service also made some significant reversals of position in the final regulations (when compared to prior proposed regulations). X Sec 263A capitalized depreciation, amortization and depletion: In determining ATI, the Service will permit add-back of depreciation, amortization and depletion that is capitalized under IRC Section 263A. Its prior position was that these items lost their character as depreciation, amortization or depletion after capitalization. Additionally, there is no need to match the add-back to when inventory or other items into which the depreciation, amortization or depletion has been capitalized are released through cost of sales. X Section 179 expense deduction: This amount is considered to be amortization and can be added back in determining ATI. The original proposed regulations had created four categories of expenses which could be treated as interest. Category #3 was broad and included as interest commitment fees, debt issuance costs, and guaranteed payments for use of capital. These are excluded from the definition of interest under the final regulations. X Limitation of the definition of Business Interest Expense: