What a wild ride. The year 2020 brought us COVID and a series of stimulus packages. It brought us a presidential election along with two very divergent thoughts on tax policy.
While the Coronavirus Aid, Relief and Economic Security Act (CARES) suspended many provisions in the Tax Cuts and Jobs Act (TCJA) for 2020, those are set to go back in place in 2021. The pandemic also means little in the way of tax legislation passed that will impact 2021. But, there are still plenty of things to consider as we look to the new year.
At the time of this writing, the presidential election has not taken place, but here are some thoughts on tax policy.
PAYCHECK PROTECTION PROGRAM FORGIVENESS
As of Oct. 1, the amount of debt discharge of a Paycheck Protection Program (PPP) loan was excluded from gross income for federal income tax purposes. However, the IRS issued guidance saying expenses attributable to excluded income from debt forgiveness are not allowable. Further, if wages are not deductible, how would that impact the 199A calculation? Borrowers should look closely at which qualifying expenses they should take to offset PPP funds.
There is a lack of clarity about the treatment of the nonallowable expenses. If the PPP forgiveness approval isn't received by year's end, the general thought is one can still claim the expenses in 2020. However, there would be an adjustment. Unless something is passed in Congress, farmers need to give significant thought to the year they file for PPP forgiveness.
SUSPENSION OF EXCESS BUSINESS LOSS
Under the TCJA, individuals were limited from using more than $250,000 ($500,000 married filing jointly) of business losses to offset nonbusiness income. The excess business loss (EBL) provision does not apply to C corporations and is indexed for inflation. EBL is treated as a loss and becomes a net operating loss (NOL). The CARES Act repealed the limitation for years beginning before Jan. 1, 2021. The repeal is nonelective and applies to 2018, 2019 and 2020.
Depending on the situation, a farmer may want to increase nonbusiness income in 2020 to utilize business losses. That may decrease nonbusiness income in 2021 when EBL comes back into play.
NET OPERATING LOSS CARRYBACK
The TCJA provides that for years ending after 2017, the NOL carryback was repealed except for farms (two-year carryback). NOLs carried forward could offset 80% of the taxpayer's taxable income. The 80% provision also applies to the two-year farm NOL carrybacks generated in years beginning after 2017.
The CARES Act allows for NOLs to be carried back five years and suspends the 80% taxable income limitation through 2020. Also, the two-year carryback provision for farms was temporarily suspended. Post-2017, NOLs will be subject to the 80% taxable income limitation for years beginning in 2021 and beyond.
Because of the suspension of the 80% offset, farmers may want to generate additional losses in 2020 to carry forward.
ADJUSTED GROSS INCOME FOR FARM PROGRAMS
Under Market Facilitation Program (MFP) and Coronavirus Food Assistance Program (CFAP), average adjusted gross income (AGI) could exceed $900,000 as long as more than 75% of your income comes from farming. In the past, wages could not be included in farm income. For those with farming corporations, this was a huge disadvantage. Going forward:
> Wages from closely held entities qualify as farm income if:
(1) the entity is owned by five or fewer individuals owning at least 50%, and
(2) the entity materially participates in farming.
> Interest Charge Domestic International Sales Corp. (IC-DISC) dividends will be treated as farm income if the IC-DISC materially participates in farming.
The clarification of farm income could help those who had payments limited by AGI.
A LOOK TO 2021 AND BEYOND
The 2021 tax year should revert back to the provisions in the TCJA. The bigger questions are who wins the presidential election, and do we have a Democrat or a Republican Congress?
As the TCJA came under President Donald Trump, we are aware of his tax policy. But, what happens if former Vice President Joe Biden wins, and the Democrats control Congress?
At press time, the outcome was unknown, but the Biden tax plan, which could come into play in any number of ways moving forward, includes these provisions:
> Increase corporate tax rates to 28%.
> Phase out 199A deduction for income more than $400,000.
> Eliminate stepped-up basis.
> Restore the 39.6% tax rate for income more than $400,000.
> Increase capital gains from 20 to 39.6% for income over $1 million.
> Impose 12.4% social security tax on wages above $400,000.
> Increase Child and Dependent Care
The biggest challenge to farming under the Biden plan is not income tax, it is estate tax. Without stepped-up basis, the beneficiary would take the deceased individual's basis in the assets. In farming, this often means land would have minimal basis, and equipment/buildings would have little basis (assuming Section 179 and bonus depreciation are used). The result is a huge deferred tax liability looming for the farm community.
There is also the issue of the estate tax exemption. Currently, the estate tax exemption is $11.58 million per person. This is set to sunset at the end of 2025 and revert to pre-TCJA numbers. The president and Congress could revert the estate tax exemption to pre-TCJA prior to 2026.
Herein lies the problem: If the estate exemption is lowered, many farms (1,000-plus acres) may be subject to estate taxes. In addition, if heirs were to sell the assets, they would pay tax on the gain (which may be substantial assuming no stepped-up basis). If capital gains tax increases to ordinary tax rates for those with income over $1 million, there could be instances when heirs sell farmland, and the combined estate and tax rates are in excess of 69%.
There has been no word on a small business/farm exclusion for the estate tax exemption. Some sort of relief should emerge so that small businesses and farms would not get snared in the wide net cast going after high net worth estates. But there are
> DTN Tax Columnist Rod Mauszycki, J.D., MBT, is a tax principal with CLA (CliftonLarsonAllen) in Minneapolis, Minnesota.
> Read Rod's "Ask the Taxman" column at about.dtnpf.com/tax.
> You may email Rod at email@example.com.
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