This has certainly been an eventful year. What an understatement! Between the effects of the pandemic, including the tax law changes contained in the various Congressional actions taken during the year, the fires, the elections, (including the attack on Proposition 13), Dave can’ t remember there ever being a year in his career (in its 38th year) where there is more to consider. We have a lot to discuss regarding winding up 2020, and moving into 2021.
With regard to tax law changes which happened during 2020, we saw significant changes within the stimulus packages which will affect some, if not all of you with regard to your 2020 taxes. There were changes which reinstate the net operating loss carryback, the limits on deductible charitable contributions, the moratorium on the requirement to take a minimum distribution from your IRA or other retirement plans for people over 70 ½, as well as other changes contained in the bills enacted during the year.
The Payroll Protection Program loans which many of you may have accessed are confusing. The subsequent changes meant to make the loans easier to be forgiven have made the calculations more confusing for most people. The issuing banks are just now coming out with their applications for forgiveness. Do not delay in getting your application in. We can help answer any questions you may have about the PPP loan program as well as clarify the items that the forgiveness application is requesting. Note that there are simplified procedures available to PPP loans under $50,000 as well as loans who will qualify for forgiveness on payroll costs alone without looking at other non-payroll costs.
However, with regard to the PPP loan forgiveness, Congress intended that getting a PPP loan forgiven was not supposed to be a taxable event. However the IRS has taken a position that expenses paid with non-taxable income are not deductible, effectively making PPP funds taxable. This position is clearly in conflict with the intent of Congress. Suffice it to say that without a fix from Congress, there will be controversy regarding whether the PPP loan forgiveness will result in additional taxable income or not. Congress did attach “fix” language to the various follow-on stimulus proposals to clarify their intent that PPP funds that qualify for forgiveness to be totally tax free, but unfortunately none of those bills have been able to pass. Nevertheless, if you have not yet filed your forgiveness request with your bank, this will not be a 2020 issue, since there is little to no chance that the forgiveness request will be approved prior to the end of 2020. The income potential identified by the IRS will only be triggered when the loan is actually forgiven, so for all intents and purposes, the PPP loan forgiveness issues will be a 2021 issue. Given the fact that the elections are over and our representatives can now get back to the business of running the country, I expect the issue will be resolved shortly.
The elections will have consequences. Unfortunately, at this point we are still up in the air whether the Senate will remain in Republican control, or whether the Democrats have wrested the control from the Republicans. This is very significant for planning, since President Elect Biden has released his tax reform plan which contains significant structural changes to the way income in the United States will be taxed. His promise to change things “from day one” is of particular interest since we may or may not have ample time to plan for changes prior to them becoming law. While it is unlikely that the law will change “on day one” given that tax law proposals often take years to wind through congressional and senate committees prior to coming anywhere close to being signed into law, it is not impossible this may happen. If the Republicans retain control of the Senate by winning one of the two remaining seats up for grabs in Georgia, the Biden plan has very little chance of becoming law within the first two years of his term.
Mr. Biden has proposed significant changes to corporate taxation and very significant changes to estate taxation. The current estate tax law is set to sunset (go away and be replaced by prior estate tax law) in 2025. The proposed provisions include an increase in the tax rate from 40 to 45%, a reduction of the exempt estate from $11 million to $3.5 million, and instituting a “transfer tax” very similar to Canada’s “Exit Tax” in which appreciated assets held by a decedent incur income taxes at the death of the owner as if they were sold. This is a new proposal that we have never had before and which will definitely change the way we consider family wealth planning and estate planning if it ever becomes law.
