Presidential election-year tax planning is filled with uncertainty because a lot depends on who wins the election. With Joe Biden appearing to be the winner, tax prognosticators expect tax rates to rise – when is uncertain, with Senate control still undecided. However, if taxpayers and their tax advisors believe that tax rates will go up in 2021 and/or future years, then consider the following strategies before the end of 2020.
Business NOL Carrybacks to Higher Tax Years
Because of the COVID-19 pandemic, many businesses may wind up with a net operating loss (NOL) this year. A provision in the CARES Act allows businesses to carry back NOLs five years. Since the top income tax rate in 2015 was 39.6% for individuals and 35% for corporations, carrying back a loss could provide a greater benefit than carrying it forward. Also, by claiming the NOL in 2020, the benefit of the loss is realized at least a year earlier than if it was carried forward to 2021.
Business Entity Choice May Be Key
Taxpayers should analyze their business structure to determine if there would be a benefit from converting to a different entity type. While there are many factors, both tax and nontax, to consider when choosing an entity type, for tax purposes, taxpayers should consider that the corporate tax rate may increase after the election and certain dividends may be taxed as ordinary income. Additionally, the tax rate for pass-through entities (PTE’s) may increase if the individual income tax rates increase and there may be surcharges such as an additional Social Security tax on high-income taxpayers. This raises the question as to whether the qualified business income (QBI) deduction for PTE’s will be around after the election.
Timing of Capital Asset Purchases for Businesses
Business should consider purchasing capital assets and using 100% bonus depreciation, which may go away or be lowered under a Democratic administration.
Timing of Market Investment Sales
Taxpayers may want to consider selling stock now to realize any gains at this year’s tax rate. Since the wash-sale rules do not apply to recognizing gain, taxpayers may repurchase the stock within 30 days.
Individuals to Accelerate Income and Defer Deductions.
If tax rates go up, income will be taxed this year at lower rates, while deductions will be more valuable when the tax rates are higher. One way to accelerate income is to convert an IRA to a Roth IRA. Taxpayers with passive losses may be able to use those losses to offset the tax on an IRA to Roth conversion.
Taxpayers should consider transferring sufficient assets to use up most of or exhaust the available $11.58 million ($23.16 million for married taxpayers) lifetime exemption and evaluate not holding assets in anticipation of an eventual step-up in tax basis. Also, to consider asset transfer strategies that rely on valuation discounts.