Tax

When President-Elect Biden takes office in January, he will inherit a battered economy, historical national debt, and the ongoing public health crisis from COVID-19. He campaigned on promises to raise taxes for corporations and wealthy Americans and reinstate or expand tax credits and incentives for lower- and middle-income earners. But campaign promises and future reality are often two different scenarios. With 2021 right around the corner, many Atlanta taxpayers are wondering what changes they can expect to individual income taxes after Inauguration day. Important insights into the potential changes can be gleaned from the President-Elect’s proposed changes for individual income taxes.

Ahead of Inauguration Day next month, businesses are preparing for a wide-ranging possibility of tax changes and increases under the new Administration. He campaigned on a platform of tax increases for those earning more than $40,000 per year and rolling back select business tax cuts made in the Tax Cuts and Jobs Act of 2017 (tax reform). This includes an increase in the corporate tax rate to 28%, phase-out of the Section 199a deduction, 15% tax on corporate book income, and more.

One of the many lessons learned from the COVID-19 pandemic is the importance of cash flow and the need for cash flow planning. When the pandemic first arrived in Atlanta many businesses were scrambling to adjust to the various government orders including forced business closures. This meant some had to make challenging decisions to reduce costs when limited, to no revenue, was generated.  Congress stepped in offering a lifeline in the form of the CARES Act which not only created the Paycheck Protection Program (PPP) but also introduced the  Employee Retention Tax Credit (Credit).

For many physicians, making it to the end of 2020 successfully is an achievement of perseverance, planning, pivots, and good business sense. An industry not traditionally associated with financial challenges was tested thanks to COVID-19 when in-office patient contact was restricted, elective procedures were all but halted, and ongoing medical care shifted to virtual. Many offices were forced to shut their doors or furlough staff, and the added cost of PPE and technology upgrades strained already-tight budgets.

The Tax Cuts and Jobs Act of 2017 (tax reform) was designed to make the tax code easier to navigate and reduce taxes on American businesses allowing them to be more competitive. Many of the changes were well received including the reduction of the corporate tax rate to 21%, a new 20% deduction for pass-through entities, and an increase in Section 179d expensing. However, there were other changes not well received by Atlanta businesses including the elimination of the entertainment expense deduction, limitation on business meal expense deductions, and implementation of a $10,000 cap on the deduction of state and local taxes (SALT) for pass-through entities.

As the closing weeks of 2020 quickly approach many Atlanta businesses are taking a closer look to uncover new tax-saving opportunities. Given the number of challenges presented by the COVID-19 pandemic, it is not surprising there have been several new and extended federal tax incentives introduced to help businesses survive and recover. While valuable tax-saving opportunities, it is important not to forget about the tax extenders passed by Congress at the end of 2019. The one most relevant to Atlanta construction companies and contractors is the Section 45L, New Energy Efficient Home Tax Credit, which provides a credit for meeting certain energy efficiency minimums.

The COVID-19 pandemic created once in a lifetime business challenges and economic conditions. Not only were Atlanta businesses impacted by government orders about when and how they could operate, but there were also issues related to employee health and the threat of infection. As COVID-19 spread many Atlanta employers were forced to deal with employees that were either infected or forced to quarantine and not able to work. Not only did this impact production but it also stressed companies that had to pay sick benefits at a time when financial challenges were popping up everywhere

The changes to the meal and entertainment deduction caught many off-guard. Tax reform eliminated the opportunity for businesses to deduct entertainment-related activities and changed the deduction for certain meal expenses to 50%. Unlike other aspects of tax reform that have been modified during COVID-19, this deduction has not been changed. In fact, the IRS had only published proposed rules which were effective until the release of final regulations (TD-9925).

The combination of 1031 like-kind exchanges and cost segregation studies have long been two of the better tax tools in construction and real estate owners’ toolboxes. The combination of tax deferrals and bonus depreciation created advantageous scenarios where capital gains were deferred, investments continued to grow, and personal property could be depreciated at an accelerated rate. When the Tax Cuts and Jobs Act (TCJA) was passed in 2017, it limited the use of 1031 exchanges to real property only.

The challenges faced by businesses during the COVID-19 pandemic have been trying, frustrating, and difficult. From the initially forced business closures and stay at home orders to finding new sources of working capital, it has been a difficult time. Despite all the hardships, a silver lining has been the various tax saving opportunities implemented to help businesses reduce tax liability.