CBIZ & MHM EXECUTIVE EDUCATION SERIES - THE DUST IS SETTLING: THE ELECTION AND THE POTENTIAL FOR NEW TAX LAWS - MAYER HOFFMAN MCCANN P.C.
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CBIZ & MHM
Executive Education Series™
The Dust is Settling: The Election and
the Potential for New Tax Laws
Bill Smith and Nathan Smith
November 12, 2020
Questions? Email cbizmhmwebinars@cbiz.com 1
About Us
• Together, CBIZ & MHM are a Top Ten accounting provider
• Offices in most major markets
• Tax, audit and attest and advisory services
• Over 4,800 professionals nationwide
A member of Kreston International
A global network of independent
accounting firms
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting,
tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.
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Before We Get Started…
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CPE Credit
This webinar is eligible for CPE
credit. To receive credit, you will
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External participants will receive
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Questions? Email cbizmhmwebinars@cbiz.com 4
Disclaimer
The information in this Executive Education Series
course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further
discuss the impact on your business.
Questions? Email cbizmhmwebinars@cbiz.com 5
Presenters
Bill Smith is a managing director in the CBIZ National Tax Office. Bill
monitors federal tax legislation and consults nationally on a broad range
of tax issues for businesses and individuals. He is frequently sought after
by a myriad of media outlets to comment on the changing tax
environment and its effects on companies and individuals. He has
authored numerous tax articles, edits the CBIZ MHM tax newsletters
and thought leadership articles, and lectures on a broad range of tax
topics across the country.
William M. Smith, Esq. 301.961.1943 • billsmith@cbiz.com
Managing Director,
CBIZ National Tax Office
Questions? Email cbizmhmwebinars@cbiz.com 6
Presenters
Nathan Smith is a Director in the CBIZ National Tax Office, bringing over
20 years of experience in public accounting to provide technical support
and strategic solutions for the firm’s tax practice. Nathan leads the
development of practice aids and tactical approaches used in
responding to industry and Federal tax developments in a variety of
subject matter areas. Nathan also consults nationally to facilitate
delivery of client service opportunities and solutions, contributes as an
author and editor to the firm's tax thought leadership publications and
assists with the development and implementation of national tax
Nathan Smith, CPA policies and procedures.
Director,
CBIZ National Tax Office 727.572.1400 • nate.smith@cbiz.com
Questions? Email cbizmhmwebinars@cbiz.com 7
Agenda
01 Biden Tax Plan and Likelihood of Tax Legislation
02 Stimulus Legislation
03 Tax Impact of Forgiven PPP Loans
04 Actions to Consider With Election Results Uncertain
Questions? Email cbizmhmwebinars@cbiz.com 8
Biden’s Tax Plan & Likelihood of Passage Questions? Email cbizmhmwebinars@cbiz.com 9
Probability of Tax Legislation
• House of Representatives
• 435 voting members of the House – 218 for majority
• Prior to election
• Democrats: 232
• Republicans: 197
Vacancies and party switching accounted for remaining 6 seats
• Projected post-election
• Democrats hold majority but lose seats
• Democrats: 226
• Republicans: 209
Questions? Email cbizmhmwebinars@cbiz.com 10Probability of Tax Legislation (cont’d)
• Senate
• 100 Senate seats total
• 35 for 2020 Election
Republican: 23 seats
Democrat: 12 seats
• 50 seats + Vice President for “majority”
• Before election
• Republicans: 53 seats
• Democrats: 47 seats, including two independents who caucus with Democrats
• Initial results
• Republicans: 50 seats
• Democrats: 48 seats
• Without 60 votes, reconciliation is required to circumvent filibuster
• Byrd Rule
Not deficit increase beyond a 10-year budget window
No change that would affect the Social Security Trust Fund
Questions? Email cbizmhmwebinars@cbiz.com 11The Senate Races – And Then There’s Georgia
• Georgia has suddenly become home to two of the most competitive
Senate campaigns in the country
• Initial counts indicate no candidate attained 50%
• Both races head to a runoff on Jan. 5
• Runoff from regular election: Perdue (R); Ossoff (D)
• Special election: 15 candidates
• Runoff: Kelly Loeffler (R) and Raphael Warnock (D)
• Republicans are betting that the state’s natural conservative lean will
snap back and deliver the seats to the GOP, particularly if Joe Biden is
president-elect
• Voters can register up until Dec. 7 Source: Politico Oct 31
Questions? Email cbizmhmwebinars@cbiz.com 12Probability of Tax Legislation (cont’d)
• Democrats Flip the Senate
• One Option: BLOCK THAT FILIBUSTER!
• Key players in both parties say that the potential elimination of filibusters by
means of a simple-majority procedural vote (known as the nuclear option) would
open a pathway to bring a broad range of legislation, including tax bills, to the
Senate floor
Such a procedural change would mirror the Republicans' use of the nuclear option to end
filibusters of Supreme Court nominees in 2017 and Democrats' elimination of the
filibusters of nominees for other judicial and executive branch posts in 2013
Senate Minority Whip Dick Durbin, D-Ill., said Democrats would weigh whether to end
filibusters early in the new Congress if they win control of the White House, the House, and
the Senate in the November election
Questions? Email cbizmhmwebinars@cbiz.com 13TIME FOR A
POLL QUESTION
Which movie did Treas. Sec. Steven Mnuchin NOT produce?
• Wonder Woman
• Birdman
• Mad Max: Fury Road
• The Conjuring 2
Questions? Email cbizmhmwebinars@cbiz.com 14Show Me the Money!
Congressional Research Service, “Overview of the Federal Tax System in 2020,” CRS Report R45145
Questions? Email cbizmhmwebinars@cbiz.com 15Biden’s Tax Plan
• Business
• Increase corporate rate from 21% to 28%
• Minimum tax on corps with book profits over $10M
• Eliminate repatriation benefits for multi-nationals
• Double the GILTI tax from 10.5% to 21%
• Taxes earnings > 10% on invested foreign assets
• Leave rest of TCJA intact
• Phase out Qualified Business Income (QBI) (§ 199A 20% deduction) for income over $400K
• Eliminate carried interest preference
• Energy
• End fossil fuel credits
• Restore electric car credit
• Restore various credits for business and individuals for energy efficiency
Questions? Email cbizmhmwebinars@cbiz.com 16Biden’s Tax Plan
• Business (cont’d)
• 10% manufacturing communities tax credit
• Promote revitalizing, renovating, or retooling existing or recently closed down facilities
• Available for projects that expand U.S. facilities to grow domestic employment or for
companies that increase manufacturing wages above stated pre-COVID-19 baseline
• Projects receiving the credit would have to benefit local workers and communities
• Tax credits to small business for adopting workplace retirement savings plans
• New 10% surtax on corporations that “offshore manufacturing and service jobs to
foreign nations in order to sell goods or provide services back to the American
market”
• This surtax would raise the effective corporate tax rate on this activity up to 30.8%
Questions? Email cbizmhmwebinars@cbiz.com 17Biden’s Tax Plan
• Individuals
• Increase maximum tax rate to 39.6% from 37% (pre-TCJA rates) on income over
$400K
• Increase capital gains rates to 39.6% on for TPs with income over $1M (not
specified if only capital gains considered)
• Effective rate 43.4% with NIIT
• Promise not to increase taxes on anyone with income less than $400K
• Trump campaign claims taxes will go up for over 80% of population
• Earned Income Tax Credit (EITC) and Dependent Care Credit expanded
• Refundable child care tax credit up to $8,000 for one child and $16,000 for two or
more (current limit $2,000)
• New $8,000 credit for caregivers of individuals with physical or cognitive impairments
• “Pease” limit on itemized deductions for TPs with income over $400K
• Limit benefit of itemized deductions to 28%
Questions? Email cbizmhmwebinars@cbiz.com 18Biden’s Tax Plan
• Individuals (cont’d)
• Remove impediment for workers over 65 and workers without children to claim EITC
• Eliminate step up in basis for capital assets held at death and return exemption to 2009 levels
($3.5M indexed)
• On Oct. 22, the Tax Foundation, a conservative think tank, projected Biden's plan to return estate tax
to 2009 levels would raise $281 billion in revenue over 10 years
• Raise top estate and gift rate to 45%
• Wages over $400K subject to social security tax
• Current max is $137,700
• First-Time Homebuyers’ Tax Credit of $15,000
• Refundable renter’s tax credit capped at $5 billion per year, aimed at holding rent and utility
payments at 30% of monthly income
• Eliminate IRC Section 1031 like-kind exchange transactions for TPs with income over $400K
• SALT Cap?
• Raise NIIT threshold from $250K to $400K?
Questions? Email cbizmhmwebinars@cbiz.com 19Next Round of Coronavirus Legislation Questions? Email cbizmhmwebinars@cbiz.com 20
TIME FOR A
POLL QUESTION
What year was the AICPA founded?
• 1887
• 1913
• 1921
• 1930
Questions? Email cbizmhmwebinars@cbiz.com 21Lame Duck Stimulus Possibility
• House Democrats on May 12 unveiled a 1,815-page, $3 trillion "CARES 2"
phase for economic relief package
• On Sept. 28, the House released an updated version of the Heroes Act,
with a $2.2 trillion price tag
• House passed the HEROES 2 Act on Oct. 1
• Pelosi – Mnuchin talks failed while McConnell said “any deal unlikely to
pass the Senate”
• Senate Republicans passed stand alone $500 billion aid bill, which died in
the House
• Possibility of lame duck relief bill passing is unlikely if Democrats flip the
Senate, as Senate Republicans unlikely to support deficit increase
Questions? Email cbizmhmwebinars@cbiz.com 22Tax Impact of Forgiven PPP Loans Questions? Email cbizmhmwebinars@cbiz.com 23
Tax Ramifications of PPP Loan Forgiveness
• “Pray you now, forget and forgive.”
• Shakespeare: King Lear
• Forgiveness is a tax free event – deductions are the issue
• Expense and forgiveness in the same year – no deduction
Questions? Email cbizmhmwebinars@cbiz.com 24Tax Ramifications of PPP Loan Forgiveness (cont’d)
• Notice 2020-32: No federal income tax deduction allowed for an expense
that is otherwise deductible if the payment of the expense results in
forgiveness of a PPP loan
• While bemoaned by taxpayers, industry groups, and even a few members of
Congress, Treasury Secretary Steven Mnuchin defended the IRS position and
described it as “tax 101”
• However, the rule is not as simple as Secretary Mnuchin described, because
the timing of such nondeductible treatment is not clear. Does the
nondeductible treatment impact taxable income in the year the qualifying
expenses are incurred, or in the year when the PPP loan is forgiven?
Questions? Email cbizmhmwebinars@cbiz.com 25Tax Ramifications of PPP Loan Forgiveness (cont’d)
Option 1
• Deduct in the year expenses incurred and recapture in the year the PPP Loan is
forgiven
• Annual accounting and the tax benefit rule
Option 2
• Don’t deduct in the year the qualifying expenses are incurred, and pick up no income
in the year of forgiveness
• IRS expectation of reimbursement
Questions? Email cbizmhmwebinars@cbiz.com 26Actions to Consider With Election Results Uncertain Questions? Email cbizmhmwebinars@cbiz.com 27
TIME FOR A
POLL QUESTION
What was the maximum capital gains tax rate from 1913-1921?
• 7%
• 12.5%
• 15%
• 28%
Questions? Email cbizmhmwebinars@cbiz.com 28Tax Planning Ideas That Can Wait Until You File Your 2020 Return (Oct. 15 Latest)
• Electing not to take Bonus Depreciation or Utilizing Section 179
deduction
• Electing out of Installment Reporting
• Using 100% AGI Limit for Cash Contributions to Public Charities
Questions? Email cbizmhmwebinars@cbiz.com 29ACCOUNTING METHOD STRATEGIES Questions? Email cbizmhmwebinars@cbiz.com 30
When Should Accounting Method Strategies Be Considered?
• In normal circumstances, taxpayers often seek to defer recognition of income and
accelerate recognition of deductions
• However, the prospect of higher tax rates in future years may turn this conventional
wisdom on its head, where taxpayers may seek to accelerate recognition of income
and defer recognition of deductions
2020 Income Tax Rates (Current Law) 2021 Income Tax Rates (Biden Plan)
Individual Individual
Maximum bracket 37% (>$622k MFJ) Maximum bracket 39.6% (>$628k MFJ ?)
Long-term capital gains maximum 20% (>$497k MFJ) Long-term capital gains maximum 39.6% (>$1M)
Net investment income tax 3.8% (>$250k MFJ) Net investment income tax 3.8% (>$250k MFJ)
C corporation C corporation
Flat 21% 28% (assuming flat)
Questions? Email cbizmhmwebinars@cbiz.com 31When Should Accounting Method Strategies Be Considered?
• There are many tax accounting method strategies that can help to accomplish this
objective, but before implementing any of these strategies, it is essential to
understand the nature of the involved item and the taxpayer’s long-term business
plan
Questions? Email cbizmhmwebinars@cbiz.com 32When Should Accounting Method Strategies Be Considered?
• A method of accounting involves an accounting practice that does not permanently
affect a taxpayer’s lifetime taxable income, but rather changes (or could change) the
taxable year(s) in which the item is taken into account
• Hence, changes in methods of accounting impact temporary differences, not permanent differences
• Nevertheless, temporary differences that are recurring or that are renewed each year
have the practical effect of being permanent, as long as the taxpayer stays in business
• These are sometimes referred to as “permanent” temporary differences
• For example, consider a taxpayer that prepays a $100,000 insurance premium every year, for insurance
coverage to be provided during the next year
• $100,000 is capitalized as prepaid insurance for book/financial statement purposes
• If the $100,000 is expensed upon payment for tax purposes, there is a temporary difference during year 1 that
will reverse during year 2 when book insurance expense exceeds tax insurance expense
• But as the year 1 difference reverses in year 2, the taxpayer will prepay another $100,000 insurance premium,
and re-start the cycle, whereby the net practical effect is no reversal of the year 1 difference until such time that
the taxpayer ends business activities
Questions? Email cbizmhmwebinars@cbiz.com 33Cash to Accrual Changes in Overall Method of Accounting
• For businesses that anticipate a sale event in the near term, or that otherwise
anticipate a change to their cash flow dynamic, consider a change from the overall
cash method to the overall accrual method of accounting
• The tax law commonly known as the Tax Cuts and Jobs Act (TCJA) established for small
taxpayers (other than tax shelters) the ability to use the overall cash method of
accounting
• “Small” taxpayers are those that have 3-yr average gross receipts (not counting the current year)
below $26 million
• Any service-based business that is not a C corporation (or a partnership with C corporation
partners) is eligible to use the cash method regardless of the TCJA small taxpayer rule
• A change to the overall accrual method will accelerate income with respect to
accounts receivable, will defer deductions for certain prepaid items, and will
accelerate deductions for certain accrued expenses
• Receivables often outpace payables, so the accrual method generally accelerates net income
Questions? Email cbizmhmwebinars@cbiz.com 34Cash to Accrual Changes in Overall Method of Accounting
Example
• Better Call Saul, Inc. (a C Corporation) is a reputable law firm with $400,000 in client invoices
outstanding as of 2019, and these invoices will not be collected until 2021
• Better Call Saul also generates an additional $400,000 in client invoices during 2020, and
these invoices will also be collected in 2021
• Under the cash method of accounting, the $400,000 from 2019 and the $400,000 from 2020 will
not be taxed until collected in 2021
• Under the accrual method of accounting, the $400,000 from 2019 and the $400,000 from 2020
would be taxed when Better Call Saul has a fixed right to the receivables in 2019 and 2020,
respectively
• If Better Call Saul requests a change from the cash to the accrual method during 2020, a
catch-up adjustment of $400,000 for the 2019 receivables will be required during 2020
• Under section 481, this adjustment is taken into account in taxable income 25% during 2020, and
25% during the subsequent 3 tax years
Questions? Email cbizmhmwebinars@cbiz.com 35Cash to Accrual Changes in Overall Method of Accounting
Example (cont’d)
2020 Income Tax Rates 2021 Income Tax Rates 2022-2023 Income Tax Rates
Total Taxes
(Current Law) (Biden Plan) (Biden Plan)
Cash method Cash method Cash method Cash method
2019 A/R $0 x 21% = $0 $400,000 x 28% = $112,000 $0 x 28% = $0 $112,000
2020 A/R $0 x 21% = $0 $400,000 x 28% = $112,000 $0 x 28% = $0 $112,000
Accrual method (w/ sec. 481 Accrual method (w/ sec. 481 Accrual method (w/ sec. 481 Accrual method (w/
adj.) adj.) adj.) sec. 481 adj.)
2019 A/R $100,000 x 21% = $21,000 $100,000 x 28% = $28,000 $200,000 x 28% = $56,000 $105,000
2020 A/R $400,000 x 21% = $84,000 $0 x 28% = $0 $0 x 28% = $0 $84,000
Questions? Email cbizmhmwebinars@cbiz.com 36Other Accounting Method Strategies
• When a change from the overall cash method to the overall accrual method is
impractical or not strategic (i.e., the business does not anticipate a sale or a reversal of
the temporary difference in the near term), traditional cash management timing under
the continuing use of the cash method should be considered
• If tax rates are expected to increase in future years, then contrary to conventional wisdom,
cash method businesses should consider accelerating income and deferring expenses
• Accelerate collection efforts during 2020 for outstanding customer receivables
• Delay cash expenditures until 2021
• For all types of businesses, consider electing out of 100% bonus depreciation and not
making a Section 179 asset expensing election
• This will “slow down” cost recovery on fixed assets, whereby tax deductions are shifted to
later years
• These decisions do not need to be made during 2020, and can be made in 2021 when the tax
return is filed (at which time there may be more certainty about future tax rates)
Questions? Email cbizmhmwebinars@cbiz.com 37Deferral Method for Advance Payments – Change to Full Inclusion Method
• Accrual method taxpayers often receive advance payments from customers for goods
or services to be provided in later years
• Although advance payments generally are taxable in the year of receipt, taxpayers
may utilize the deferral method to delay taxation until the subsequent tax year
• If the taxpayer has an applicable financial statement, the year 1 deferral is equal to the
amount deferred in the financial statement
• If the taxpayer does not have an applicable financial statement, the year 1 deferral is equal to
the amount of the advance payment that the taxpayer did not earn during year 1, determined
under the appropriate tax principles
• Because the deferral method is optional, taxpayers desiring to accelerate income may
choose to recognize all of the advance payment in taxable income during the year of
receipt (the “full inclusion method”)
• A change in accounting method to use the full inclusion method produces similar results to
the scenario involving a change to begin using the overall accrual method
Questions? Email cbizmhmwebinars@cbiz.com 38Businesses Planning to Sell that Have LIFO Inventories
• A manufacturer or retailer/wholesaler that maintains inventories under the LIFO method
generally obtains tax benefits by referencing lower costs for inventory on hand at the
end of the year, as this results in a higher cost of goods sold
• This inventory treatment is another type of “permanent” temporary difference that will not
reverse as long as the taxpayer remains in business (i.e., does not deplete the LIFO base layer)
• If the taxpayer plans to sell the business in the near term, the taxpayer can consider
revoking its LIFO election for inventory accounting ahead of time, where the taxpayer
can begin computing inventory under the FIFO valuation approach
• The change from LIFO to FIFO is a change in method of accounting, where generally the
taxpayer recognizes the “catch-up” amount (the cumulative difference to taxable income
between LIFO and FIFO) under Section 481, where 25% of the catch-up is recognized in
the year of change, and the remaining 75% is recognized over the next 3 years
• Any income accelerated under this strategy into tax years that are subject to a lower tax rate may
be beneficial, provided the taxpayer otherwise plans trigger this tax in the near term anyway
Questions? Email cbizmhmwebinars@cbiz.com 39ACCELERATING CAPITAL GAINS Questions? Email cbizmhmwebinars@cbiz.com 40
Accelerating Capital Gains
• Recall that candidate Biden proposes raising the long-term capital gains tax rate to
the ordinary income tax rates for individuals with $1 million of income
• Biden also proposes to reset the maximum ordinary tax rate for individuals to the
pre-TCJA 39.6% rate
• As a result, the maximum tax rate for long-term capital gains would increase from 20% to 43.4%
with NIIT
2020 Income Tax Rates (Current Law) 2021 Income Tax Rates (Biden Plan)
Individual Individual
Maximum bracket 37% (>$622k MFJ) Maximum bracket 39.6% (>$400k MFJ)
Long-term capital gains maximum 20% (>$497k MFJ) Long-term capital gains maximum 39.6% (>$1M)
Net investment income tax 3.8% (>$250k MFJ) Net investment income tax 3.8% (>$250k MFJ)
C corporation C corporation
Flat 21% 28% (assuming flat)
Questions? Email cbizmhmwebinars@cbiz.com 41Accelerating Capital Gains
• As a result, it may prove beneficial to accelerate planned capital gains into 2020 vs.
later years, in order to take advantage of the present-day lower rates
• This strategy may be beneficial even if the result is that a gain is taxed as a short-term
capital gain in 2020
Example
• Ware N. Buphett owns 10 shares Class A stock in Berkshire Hathaway, currently
valued at $315,000 per share, for which Ware originally paid a nominal amount to
acquire many years ago, such that Ware’s unrealized gain is roughly $3,150,000
• Assume Ware’s income subjects Ware to the maximum capital gains and ordinary tax
rates under either the current law or under the Biden plan
• If Ware plans to sells these 10 shares in the near future, following are the results in
2020 vs. 2021 under the Biden plan
Questions? Email cbizmhmwebinars@cbiz.com 42Accelerating Capital Gains
Example (cont’d)
2020 Income Tax Rates (Current Law) 2021 Income Tax Rates (Biden Plan)
$3,150,000 x 23.8% = $749,700 $3,150,000 x 43.4% = $1,367,100
[20% Long-term capital gains rate and 3.8% Net investment income [39.6% Long-term capital gains rate and 3.8% Net investment income
tax rate apply] tax rate apply]
• Continuing with this example, assume instead that Ware acquired these 10 shares
only a few months ago, such that the short-term capital gains rates apply
2020 Income Tax Rates (Current Law) 2021 Income Tax Rates (Biden Plan)
$3,150,000 x 40.8% = $1,285,200 $3,150,000 x 43.4% = $1,367,100
[37% Short-term capital gains rate and 3.8% Net investment income [39.6% Short-term capital gains rate and 3.8% Net investment
tax rate apply] income tax rate apply]
Questions? Email cbizmhmwebinars@cbiz.com 43INSTALLMENT SALES Questions? Email cbizmhmwebinars@cbiz.com 44
Installment Sales
• Installment sales are another instance where electing to report the full amount of
income in the current year (i.e., electing out of installment reporting) may be more
beneficial than reporting the income over a number of years, if tax rates are lower in
the current year
• For tax purposes, gain (but not loss) on the sale of property is recognized over the years in which
installment payments are received ratably with respect to those payments
• Sales of publicly traded stock, inventory, depreciable property to a related person, certain property held
by a dealer, and personal property under a revolving credit plan do not qualify
• Depreciation recapture on sales of depreciable property must be reported in the year of sale
• Unlike some of the other strategies, taxpayers can wait until after 2020 to decide whether
they want to elect out of installment reporting, where the decision does not have to be
made until the 2020 tax return is filed in 2021
• This gives taxpayers the chance for certainty about where tax rates may be during 2021, before
making a decision to accelerate taxes into 2020
Questions? Email cbizmhmwebinars@cbiz.com 45Installment Sales
Example
• In 2020, Mr. Washington sold a cherry tree that he acquired many years ago for no
cost. The buyer will pay Mr. Washington $5,000,000 for the tree on account of its
historical significance, with payments set at $1,000,000 per year over 5 years
(beginning 2020).
• Under the installment method, the $5,000,000 gain is reported ratably over the 5 years at
$1,000,000 per year
• Assume Mr. Washington’s income subjects Mr. Washington to the maximum capital
gains and ordinary tax rates under either the current law or under the Biden plan
Questions? Email cbizmhmwebinars@cbiz.com 46Installment Sales
Example (cont’d)
2020 Income Tax Rates 2021 Income Tax Rates 2022-2024 Income Tax Rates
Total Taxes
(Current Law) (Biden Plan) (Biden Plan)
Installment reporting Installment reporting Installment reporting Installment
$1,000,000 x 23.8% = $1,000,000 x 43.4% = $3,000,000 x 43.4% = reporting
$238,000 $434,000 $1,302,000 $1,974,000
[20% Long-term capital gains rate [39.6% Long-term capital gains rate [39.6% Long-term capital gains rate
and 3.8% Net investment income and 3.8% Net investment income and 3.8% Net investment income tax
tax rate apply] tax rate apply] rate apply]
No Installment reporting No Installment reporting No Installment reporting No Installment
$5,000,000 x 23.8% = $0 x 43.4% = $0 $0 x 43.4% = $0 reporting
$1,190,000 $1,190,000
[20% Long-term capital gains rate [39.6% Long-term capital gains rate [39.6% Long-term capital gains rate
and 3.8% Net investment income and 3.8% Net investment income and 3.8% Net investment income tax
tax rate apply] tax rate apply] rate apply]
• Note that Mr. Washington’s total payments in year 1 are insufficient to cover his year 1 tax obligation under the “no installment reporting”
scenario, so Mr. Washington will need some financial flexibility to make the strategy work
Questions? Email cbizmhmwebinars@cbiz.com 47LIKE-KIND EXCHANGES Questions? Email cbizmhmwebinars@cbiz.com 48
TIME FOR A
POLL QUESTION
What was the flat tax rate in the Revenue Act of 1861?
• 1%
• 2%
• 3%
• 4%
Questions? Email cbizmhmwebinars@cbiz.com 49Like-Kind Exchanges
• Recall that candidate Biden proposes eliminating the ability for individuals with income in
excess of $400,000 to utilize tax-favorable like-kind exchange rules under IRC Section 1031
• In a like-kind exchange, the unrealized gain on the exchanged property is not taxed immediately if
the property is exchanged for like-kind property
• Depending on a taxpayer’s circumstances and investment plans, there are two strategies
concerning like-kind exchanges to consider
• Strategy #1: If the taxpayer has an in-process like-kind exchange, and ultimately plans to
dispose of the replacement property a few years later, the previous points about changes in
capital gains tax rates are relevant here as well (accelerate gain recognition into 2020)
• In this situation, it may make sense to “break” the in-process like-kind exchange (cause it to not
qualify), perhaps by failing to identify replacement property by the required time
• This would cause taxation for the exchanged property in 2020, and result in higher basis (less gain
potential) for the replacement property that the taxpayer plans to sell several years later
Questions? Email cbizmhmwebinars@cbiz.com 50Like-Kind Exchanges
• Strategy #2: If the taxpayer has a property and plans to replace it soon, and the
taxpayer plans to hold the replacement property indefinitely, then the taxpayer
should consider moving quickly to take advantage of the like-kind exchange rules
while they last
• If a like-kind exchange commences in 2020, it is reported in 2020 even if the exchange is
completed in 2021
• Therefore, a taxpayer should engage a qualified intermediary during 2020 to hold the
proceeds for the exchanged property, and the taxpayer can then perform the other steps
within the required time periods to complete the like-kind exchange during 2020 and/or
2021 (including the 45-day identification period and the 180-day exchange period)
Questions? Email cbizmhmwebinars@cbiz.com 51CHARITABLE GIVING Questions? Email cbizmhmwebinars@cbiz.com 52
Charitable Giving
• Individuals generally determine the deductible amount for charitable contributions with reference to
a percentage of the individual’s adjusted gross income (AGI)
• Deductions claimed as part of itemized deductions
• The percentage varies depending on the type of recipient organization and the type of property
contributed
• General limit: 50%
• If all cash to public charities: 60%
• Cash to a private foundation (including donor advised funds): 30%
• Long-term capital gain property to a public charity: 30%
• Long-term capital gain property to a private foundation: 20%
• The CARES Act temporarily modified the general rule for 2020, allowing individuals to elect to use a
100% AGI limit in lieu of the 60% AGI limit for cash contributions to public charities
• Non-itemizers may also claim an above-the-line deduction of $300
• Contributions of food inventory raised to 25% from 15%
• C corporations deductible limit raised to 25% from 10%
Questions? Email cbizmhmwebinars@cbiz.com 53Charitable Giving
• Individuals who routinely make charitable contributions every year should consider frontloading several years’ worth of
donations into 2020 to take advantage of the temporary 100% AGI limit, because total deductions over the same span of years
can potentially be increased
Contribute $40,000 Year 2020 2021 2022 2023 2024 Total
annually to charity
Charitable $40,000 $40,000 $40,000 $40,000 $40,000 $200,000
Property Tax $10,000 $10,000 $10,000 $10,000 $10,000 $50,000
Total (A) $50,000 $50,000 $50,000 $50,000 $50,000
Std Deduction (B) $24,500 $24,500 $24,500 $24,500 $24,500
Higher of (A) or (B) $50,000 $50,000 $50,000 $50,000 $50,000 $250,000
Frontload $200,000 Year 2020 2021 2022 2023 2024 Total
of donations into
Charitable $200,000 0 0 0 0 $200,000
2020
Property Tax $10,000 $10,000 $10,000 $10,000 $10,000 $50,000
Total $210,000 $10,000 $10,000 $10,000 $10,000
Std Deduction (B) $24,500 $24,500 $24,500 $24,500 $24,500
Higher of (A) or (B) $210,000 $24,500 $24,500 $24,500 $24,500 $308,000
Questions? Email cbizmhmwebinars@cbiz.com 54Charitable Giving
• In addition to frontloading donations into 2020, individuals can also consider the
creation of a type of “phantom” income during 2020 through a Roth IRA conversion
• Traditional IRA accounts are taxable to the recipient upon distribution, where the owner’s
contributions were previously tax deductible
• Roth IRA accounts are not taxable to the recipient upon distribution, where the owner’s
contributions are not tax deductible upon contribution
• A Roth IRA conversion results from turning a Traditional IRA into a Roth IRA, where
the account valuation at the time of conversion determines the taxable amount
• Current market valuations may have resulted in depressed IRA values, making the taxable
conversion amount lower presently
• Individuals who frontload donations into 2020 may have a unique opportunity to
offset the taxable income from a Roth IRA conversion with the tax deduction
obtained from the unusually large charitable contribution
Questions? Email cbizmhmwebinars@cbiz.com 55ESTATE AND GIFT PLANNING Questions? Email cbizmhmwebinars@cbiz.com 56
Estate/Gift Planning
• Biden indicated previously that he would aim to roll back the estate tax exemption to
$3.5 million from the current $11.58 million per person
• Sunsets to $5.25 million after 2025 if not extended
• Biden will also eliminate the step up in basis at death, but that affords no planning
opportunities
• The estate tax exemption works to exclude a set amount from the value of a taxable
estate, or to exclude that amount from the lifetime value of taxable gifts -- married
couples collectively can gift $23.16 million during their lifetime
• The value of lifetime gifts in excess of this amount (or the value of the estate that is in
excess of this amount) is taxable at a maximum 40% rate
• Individuals may benefit from accelerating their wealth transfer plans to take
advantage of the elevated exemption levels that presently exist
• Common strategies involve taxable gifts to trusts, where the trust beneficiaries are chosen
by the trust creators
Questions? Email cbizmhmwebinars@cbiz.com 57QUESTIONS ? Questions? Email cbizmhmwebinars@cbiz.com 58
Connect with Us
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Questions? Email cbizmhmwebinars@cbiz.com 59If You Enjoyed This Webinar…
Upcoming Courses:
• 12/1/20: Impairment: Testing Made Easy
• 12/17/20: Key Issues Facing Public Companies in 2021: SEC and PCAOB Updates
• 1/7/21: Quarterly Accounting and Financial Reporting Issues Update Q4 2020
Recent Publications:
• Initial Election Results Complicate Chances for Tax Changes in 2021
• A Closer Look at When Nondeductible Expenses from PPP Loans Impact Taxable Income
• Using a 13-Week Cash Flow to Monitor COVID-19 Recovery
Questions? Email cbizmhmwebinars@cbiz.com 60THANK YOU
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