2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

This Year in Review

Charitable Contribution Deductions The CARES Act makes a couple of significant changes to the individual charitable contribution deduction for 2020. First, up to $300 of charitable contributions can be taken as a deduction in reaching Adjusted Gross Income. This rule applies only to an individual who does not itemize. Secondly, the 60% AGI limitation for cash contributions is eliminated for 2020 for certain qualified contributions. This permits an individual to contribute up to 100% of his or her income. However, this rule applies only to cash contributions and not to contributions to certain non-operating private foundations or donor advised funds. With the waiver of the required minimum distribution, there is less incentive for an IRA owner who is 70.5 or older to make a qualified charitable distribution directly from the IRA to the charity. However, this may still be an effective strategy to receive the effective benefit of 100% of the charitable deduction, through the exclusion of the income. A qualified charitable distribution may benefit someone in a state like Connecticut, which does not permit a charitable deduction, but bases its personal income tax on a modified adjusted gross income. BUSINESS TAXATION Employee Retention Credit The law permits an eligible employer to receive a refundable Employee Retention Credit against employment taxes, equal to 50% of qualified wages for each employee taken into account for the calendar quarter. Qualified wages are limited for any employee to $10,000 of qualified wages paid from March 13through December 31, 2020, for all calendar quarters ($5,000 maximum credit per employee for the entire covered period). An eligible employer is one that has a trade or business with respect to any quarter for which: (i) The business operation is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19 (“government order” rule); or

(ii) There has been a significant decline in gross receipts (i.e., less than 50% of gross receipts for the same quarter in the prior year) and ending with the calendar quarter for which gross receipts are greater than 80% in the same calendar quarter in the prior year (“significant decline” rule). Since this is a payroll tax credit, tax-exempt organizations can also take advantage of this credit. Different rules apply depending upon whether the employer has 100 or fewer employees (small business) or more than 100 employees (large business) in the prior year. In making this determination, related entities are aggregated. Full-time employee status is considered to be 30 hours/week or 120 hours/month. Full-Time Equivalent employees may also be including when determining eligibility for this credit. For a small business, all wages paid to employees and related health benefits are included in qualified wages eligible for the credit. However, for a large business, only wages paid to employees for hours the employee does not provide service, and associated health care benefits, are considered as qualified wages. An employer who receives a PPP loan is not eligible for the employee retention credit. Like the FFCRA credits (discussed above), the Employee Retention Credit is allowed: (i) As a reduction of deposits otherwise required to be made for the quarter; (ii) As a Form 941 refund or credit; or (iii) As an advance requested on Form 7200. The Joint Committee on Taxation Report (JCTR) and the IRS FAQ provide some guidance on important aspects of the credit. Deferral of Employer Share of Payroll Taxes (or SECA for Self-Employed) For the period beginning on the date of enactment to January 1, 2021, the CARES Act allows a deferral of the employer share of social security tax (6.2%). 50% of deferred tax is payable on December 31, 2021, and the balance on December 31, 2022. This provision is elective to the employer, which is not required to take advantage of this provision.