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Looking ahead: Tax planning and the coronavirus

The coronavirus has affected virtually everyone in the nation. Its impact will be felt for years, with far-reaching effects on how practitioners work, the financial status of their clients, and the tax planning issues resulting from new legislation.

With that in mind, we asked experts to weigh in on how practitioners will be affected and what they need to know to adapt to the new environment created by the pandemic.

Tough times ahead
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There will be an unprecedented number of bankruptcies and offers in compromise, accompanied by loss of homes and home sales, according to Robbin Caruso, partner and co-chair of the national tax practice at Top 100 Firm Prager Metis. “People with current and future tax and debt problems may be forced to sell their home, depending on the bankruptcy exemptions and specific rules in their state,” she said. She noted that the last three years of federal tax assessments are not forgivable in bankruptcy.
A silver lining?
IRS headquarters
Paradoxically, this may actually be a great time to consider submitting an offer in compromise for those who qualify and have IRS tax liabilities, given the unknown current economic circumstances.

“OIC approval is based on current status, and at this time there is no guarantee that a taxpayer will get their job back or that their business will recover, which increases chances of a successful offer. All federal tax liabilities may be included in an OIC, and a principal residence will not generally be forfeited,” said Caruso.
Hungry states
Accompanying individual losses will be losses to states in reduced tax revenue from income and sales taxes.

“Many states will raise their taxes dramatically to make up for shortfalls in revenue,” predicted Bill Nemeth, president of the Georgia Association of Enrolled Agents.
Built-in obsolescence
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Tax planning will be affected by the numerous legislative and rule changes in response to the virus. End-of-year planning will be complicated by the fact that most of the coronavirus-related provisions are for one year, with practitioners faced with learning about issues for provisions that are temporary.

For example, the change to Code Section 163(j) provides an increase in the business expense limitation from 30 percent to 50 percent, and allows taxpayers to apply the increased limitation to any tax year beginning in 2019 or 2020.
Retirement help
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The CARES Act gives participants in certain retirement plans the opportunity to take penalty-free early distributions, up to $100,000, in 2020. The tax due on the distribution can be spread out over the next three years.

“One of the decisions practitioners need to guide clients on is whether to take advantage of the three-year spread, or pick it up this year, since it’s been a bad year anyway,” said Ed Zollars, partner at Thomas, Zollars & Lynch Ltd. and instructor and author at Kaplan Financial Education.
Deferring deposits
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New legislation allows employers to defer the deposit and payment of the employer’s share of Social Security taxes and self-employed individuals to defer payment of certain self-employment taxes. Employers that received a Paycheck Protection Program loan are not eligible. “This will make computation of self-employment tax very different,” said Barbara Weltman, author of “Small Business Taxes 2020.”
Handling NOLs
“The elephant in the room will be NOL carrybacks,” Weltman noted.

Under the CARES Act, net operating losses from 2018, 2019 or 2020 may be carried back to each of the five tax years preceding the tax year of the loss. “Many firms are expecting large losses for 2020,” she said.
The PPP in the long term
Paycheck protection program application form
The Paycheck Protection Program has been a help to many of those who received funds, but will complicate matters for the 2021 filing season. Qualifying for PPP loan forgiveness and calculating what amount of expenses will be disallowed will make it a difficult filing season, according to Michael Knight, partner at Knight Rolleri Sheppard CPAs.

“Moreover, the IRS position of not allowing deductions for business expenses funded by forgiven PPP loans will place practitioners in a dilemma if the position is eventually changed,” he said. “But pressure is building for modification of the eight-week rule and the 75-25 rule for loan forgiveness.”
The ramifications of remote work
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Both individuals and firms will be affected by the massive shift to employees working from home. Firms may opt to downsize their office space requirements and continue to work in a semi-virtual environment, even when the crisis is over, suggested Roger Harris, president of Padgett Business Services. “Many individuals will need training in the tax law changes, but that can be done remotely.”

And there will be a temptation for some taxpayers in high-tax states to change their residence to a low-tax state while continuing to work remotely.