The public relations industry is facing unprecedented challenges in light of COVID-19. The purpose of this month’s column is to provide agency owners with information that may be helpful.
The Coronavirus Aid Relief and Economic Security Act made changes to excess business losses. Some of the changes are retroactive and there may be opportunities for some PR agencies to file amended returns. The following are some of the changes that may impact your agency.
Deferral of the excess business loss limits
The Tax Cuts and Jobs Act provided that net tax losses from active businesses in excess of an inflation-adjusted $500,000 for joint filers—or an inflation-adjusted $250,000 for other covered taxpayers—are to be treated as Net Operating Loss carryforwards in the following tax year. The covered taxpayers are individuals, estates and trusts that own businesses directly or as partnerships or shareholders in an S corporation.
The $500,000 and $250,000 limits, which are adjusted for inflation for the tax years beginning after calendar year 2018, were scheduled under the TCJA to apply to tax years beginning in calendar year 2018 to 2025. The CARES Act has retroactively postponed the limits so that they now apply to tax years beginning in calendar years 2021 to 2025.
The postponement means that you may be able to amend:
- Any filed 2018 tax returns that reflected a disallowed excess business loss (to allow the loss in 2018) and;
- Any filed 2019 tax returns that reflect a disallowed 2019 loss and/or carryover of a disallowed 2018 loss (to allow the 2019 loss and/or eliminate the carryover).
The excess business loss limits also don’t apply to tax years that began in 2020. Thus, the 2020 year can be a window to start a business with large up-front-deductible items (for example, capital items that can be 100 percent deducted with large upfront-deductible items or other provisions) and be used to offset the resulting net losses from business against investment income or income from employment.
Changes to the excess business loss limits
The CARES Act made several retroactive corrections to the excess business loss rules as they were originally stated in the 2017 TCJA.
Most importantly, the CARES Act clarified that deductions, gross income or gain attributable to employment aren’t considered in calculating an excess business loss. Meaning, excess business losses can’t shelter either net taxable investment income or net taxable employment income. If you are planning a start-up that will begin to generate—or will still be generating—excess business losses in 2021, be mindful of that.
Another change provides that an excess business loss doesn’t include any deduction under the tax code provisions involving the NOL deduction or the qualified business income deduction that effectively reduces income taxes on many businesses.
Because capital losses of non-corporations can’t offset ordinary income under the NOL rules:
- Capital loss deductions are not considered in computing the excess business loss and;
- The amount of capital gain considered in computing the loss can’t exceed the lesser of capital gain net income from a trade or business or capital gain net income.
What you need to know about payroll tax deferral
The IRS released guidance on the payroll tax deferral from the Presidential Memorandum issued on August 8, 2020, which allows employers to defer withholding and payments of an employee’s portion of the Social Security tax if that employee’s wages are below a certain amount.
Under the guidance, the Social Security tax deferral may apply only to employees with a pretax wage or compensation that are less than $4,000 during a biweekly pay period for wages paid from September 1, 2020, through December 31, 2020, with each pay period considered separately.
Employers can defer the employee portion of the Old Age, Survivors and Disability Insurance tax under Sec. 3101(a) and Railroad Retirement Act Tier 1 tax under Sec. 3201. The due dates for withholding and payment of these taxes are postponed until Jan. 1, 2021, and ends April 30, 2021. Interest, penalties and additions to tax will begin to accrue on unpaid taxes starting May 1, 2021.
There are unknowns, such as what an employer should do when employees quit before the end of the year or how this applies to self-employed individuals. Frankly, I don’t know of any business in our practice that has expressed interest in this. Nevertheless, because it has received a fair amount of press, I thought I would mention it.
Richard Goldstein is a Partner at Buchbinder Tunick & Company LLP, New York, Certified Public Accountants.