At the end of December, we typically give a general update to clients for year-end planning. The standard practice is to review realized gains, ordinary income, and determine if there is an option to defer income and accelerate deductions. This would include harvesting capital losses in investment portfolios to offset gains, determining elections to expense capital assets with accelerated depreciation, and using donor-advised funds to account for a charitable purpose.
Looking back, it is hard to imagine that in 2020:
- January 9, 2020 – World Health Organization announced the COVID pandemic
- March 9, 2020 – the Dow suffered its worst single-day point drop ever (although increasing to approx. 5% increase for the year)
- March 21, 2020 – IRS filing deadline extended from April 15 to July 15, 2020 for the 2019 filing season
- March 27, 2020 – Coronavirus Aid, Relief, and Economic Security Act passed (CARES)
- December 3, 2020 – Mortgage Bankers Association reported net IMB net gains of $5,535 per loan compared to $4,548 in the second quarter of 2020. https://www.mba.org/2020-press-releases/december/imb-production-profits-increase-in-third-quarter-of-2020
With the extended due dates, we’ve also seen an increase in federal and state activity. The Internal Revenue Service, Large Business and International group has begun field audits by not going in the field and instead by using conference calls and the Taxpayer Digital Communication Secure File Sharing – Secure Messaging (TDC SFS-SM) to exchange information on taxpayers. This is very similar to a web-based e-mail service. Based on the IRS news release and posted on their website, letters and notices are currently delayed. Returns, letters, and notice responses are all being opened in order received. This may be 40 days after arrival and response times exceeding 60 days. Meaning if you get a notice from the IRS, you’ll get a second notice before the first response can be opened and reviewed.
And now on December 21, 2020, we have a proposed $900B stimulus package of over 5,500 pages. The Consolidated Appropriations Act (CAA) passed by Congress includes:
- Language which makes expenses paid with Payment Protection Program (PPP) funds tax-deductible. This provided needed clarity on the IRS position that the expenses are not deductible in Notice 2020-32.
- Additional economic impact payments to individuals making up to $75,000 and $1,200 for married taxpayers making up to $150,000.
- Second round of PPP loans dubbed PPP2 when the business has 300 or fewer employees, have used or will use the first round of PPP funds, and can show a 25% gross revenue decline in any 2020 quarter compared to the same quarter in 2019.
- Business meals provided by a restaurant would be 100 percent deductible from January 1, 2021 to December 31, 2022.
- Additional standard deduction for taxpayers who provide charitable donations.
- Extension and expansion of the certain paid sick and family leave credits.
The mortgage industry has seen record production and activity in 2020 and determining the best yearend strategy also depends on guessing the result of the Senate runoff elections in Georgia in January. The results of the election may change the controlling political party and tax policy for the next two or four years. For individuals, the tax policy may be:
Regardless of the results, we’ve seen that Congress continues to use tax policy as a way to influence economics. We can decide today to take advantage of current policy, whether its to purchasing and implementing new software with accelerated depreciation, reviewing technology and systems taking advantage of Research and Development Credits, or accelerating long term capital gains for potential known maximum capital gain taxes of 23.8%. The CAA is only one of the latest fiscal decisions of Congress and it won’t be the last.
For any questions on or more information, please contact Brad Marckx, Partner at email@example.com
About BKM Sowan Horan
BKM Sowan Horan is a professional accounting firm based in Texas with offices in Dallas and Austin. We have a national practice specializing in mortgage banking, real estate, professional services and other small to mid-size businesses. Our commitment is to being a strategic, innovative, and responsive partner, distinguishing us from other accounting firms. We desire to make a difference in the lives of our clients and the careers of our employees through interaction with those clients. We will seek out appropriate solutions and options for our clients with the objective of creating long-term professional relationships. To learn more, please visit www.bkmsh.com.
About the author
Brad started his career approximately 25 years ago working as a revenue agent with the Internal Revenue Service (IRS). The background with the IRS and a Masters Degree in Taxation (MT) from University of Denver provides a solid foundation in helping businesses, both private and public. Brad’s area of concentration include federal and state tax planning and compliance, ASC 740, Accounting for income taxes (including documentation of uncertain positions), entity choice, and strategic plans and forecasts. Brad’s clients benefit from tax strategies that work with the short- and long-range business objectives. Listening to individuals and management teams’ objectives and educating on the tax options provides a collaborative approach. This may include state nexus, mergers and acquisitions, or other complex situations.
Brad enjoys the collaboration, the foundation of BKM Sowan Horan, that comes from working with dedicated professionals and managing a diverse group of clients which include the mortgage banking, real estate, health care, energy, and other industries.