2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

Contractors, COVID and the CARES Act: What You Need to Know

MORE BUSINESS INTEREST EXPENSE ALLOWED Interest is a very common expense in the construction trade. Introduced by TCJA, IRC section 163(j) imposes limitations on the ability of many companies to take a full current year tax deduction for business interest expense. Under TCJA, deductible business interest expense was limited to:

NET OPERATING LOSS CHANGES Due to the cyclical nature of a contractor business, Net Operating Losses (NOLs) can occur. This is a situation that arises when the net business activities of a contractor result in an overall loss. Although contractors and construction companies have had a string of good years recently, those with losses may have been adversely affected by TCJA. The TCJA modified the rules surrounding NOLs by limiting utilization of post-2017 losses to 80% of taxable income. This limitation could result in a tax, even if a contractor was in a loss carryover position. Additionally, under TCJA, NOLs could not be carried back to prior years. The CARES Act temporarily modified these restrictions by removing the 80% limitation. Plus, in an effort to get much needed cash into the hands of businesses incurring losses, the CARES Act allows NOLs generated in years 2019 and 2020 to be carried back five years. Since tax rates were higher in years 2014-2017, it’s likely beneficial to carryback any post-2018 losses to an earlier year in order to obtain a refund. Businesses should seek to maximize losses in 2020 and review prior filings for opportunities to amend and/or carryback losses. ESTATE PLANNING – DON’T WAIT! TCJA introduced a doubling of the lifetime exemption to $11,580,000 per individual. This is still the current exemption which is set to expire at the end of 2025. There has been speculation that this exemption amount may be lowered due to the current economic crisis. Therefore, estate planning should be addressed immediately, as there may be a limited opportunity for families to save gift and estate taxes. The ability to transfer a significant portion of one’s wealth free of the gift and estate tax is an often overlooked tax planning item. With the uncertainty of the economy of this past year, many construction companies may be looking at reduced valuations, which would allow an even larger portion of a contractor’s assets to be passed onto the next generation with little to no gift tax expense.

1. 30% of adjusted taxable income, plus 2. 100% of business interest income, plus 3. 100% of the taxpayer’s floor plan interest.

While there are exclusions to this new code section for small businesses and certain electing real property trades or businesses, the intent of this code section was to limit interest deductions. The CARES Act temporarily and retroactively increases the limitation on the deductibility of interest expense from 30% to 50% for tax years beginning in 2019 and 2020. This change allows for greater deductions and an opportunity may exist to amend filed returns in order to take advantage of larger deductions. Under TCJA, non-corporate taxpayers were subject to business loss limitations. Starting in 2018, business losses were limited to $500,000 ($250,000 if married filing separately) in the current year. The excess losses would be carried over to the following years. Under the CARES Act, this limitation has been removed for tax years 2018, 2019 and 2020. This may pose a significant savings opportunity, and as previously mentioned, businesses should seek to maximize losses in 2020, as well as review prior filings for opportunities to amend. INCREASE TO BUSINESS LOSS LIMITATIONS