In guidance issued in late November, the IRS confirmed that taxpayers that received a Paycheck Protection Program (PPP) loan and that paid eligible expenses with proceeds from that loan cannot deduct those expenses in the tax year in which the expenses were paid if, at the end of that tax year, the taxpayer reasonably expects to receive forgiveness of the covered loan based on the otherwise deductible expenses.

The IRS ruling discusses two situations in which a taxpayer receives a PPP loan in 2020 and pays expenses, including payroll, mortgage interest, and rent, that are eligible expenses under the CARES Act. In one situation, the taxpayer applies for forgiveness of the PPP loan (and knew the amount of expenses that qualifies) in November 2020 but has not been informed by the lender at the end of 2020 whether the loan will be forgiven. In the second situation, the taxpayer has not applied for loan forgiveness by the end of 2020 but knew the amount of expenses that qualifies.

The IRS says in both situations, the taxpayer has a reasonable expectation of reimbursement (in the form of loan forgiveness) at the end of 2020; therefore, deduction of the expenses is inappropriate.

Safe harbor if loan is not forgiven

In separate guidance, the IRS issued safe-harbor rules that allow a taxpayer to claim a deduction in the taxpayer’s 2020 tax year for certain otherwise deductible eligible 2020 expenses if the taxpayer received a PPP loan that the taxpayer expects to be forgiven after its 2020 tax year and in a later year the taxpayer is denied PPP loan forgiveness, or the taxpayer decides not to request PPP loan forgiveness. In that situation, under the revenue procedure’s safe harbor, the taxpayer can deduct some or all of the expenses on a tax return, extension, or amended return.

How might this affect you?

Prior to this guidance from the IRS, there was considerable uncertainty regarding how PPP loan forgivness might affect a person’s tax situation, and whether PPP loan forgiveness should be pursued in 2020, or if forgiveness should be delayed until 2021. With this guidance, it is now clear that in many cases PPP loan recipients should pursue loan forgiveness immediately with the knowledge that the safe harbor is available in the event that loan forgiveness is denied.

If you or your business is the recipient of a PPP loan, contact our office so that we can look at your individual circumstances and evaluate how this new guidance affects your personal situation.

A common misconception in tax filing is that those who use the Standard Deduction instead of itemizing deductions have few additional benefits available to reduce their tax bill. This is often not the case.

Should you take the standard deduction or itemize?

Every taxpayer can take the Standard Deduction to reduce their income. However, if your deductions are going to exceed the standard amount you can choose to itemize your deductions. The most common reason people itemize deductions is that they own a home, since mortgage interest and property taxes are deductible and generally high enough to justify itemizing. But with higher Standard Deductions, fewer taxpayers are able to itemize.

Common sources of itemized deductions are: mortgage interest, property taxes, charitable giving, high medical expenses, and other miscellaneous deductions.

Strategies for non-itemizers

So what opportunities to reduce your taxable income are available if you use the Standard Deduction? Here are some of the most common:

• IRA Contributions (up to $6,000 or $7,000 if age 50 or over)
• Student Loan Interest ( up to $2,500)
• Educator Expense Deduction (up to $250)
• Alimony Paid (for divorce decrees prior to 2019)
• Health Savings Accounts (if you qualify)
• Self-employed health insurance premiums
• Half of self-employment tax
• Numerous education incentives like Savings Bond Interest, Coverdell accounts, American Opportunity Credit and the Lifetime Learning Credit
• Plus numerous credits including the Earned Income Credit, Dependent Care Credit, Child Tax Credit, Retirement Savings, and Elderly Credit

Income limitations often apply to these tax reduction opportunities, but for those who qualify, the tax savings can be significant. This list is by no means complete. What should be remembered is that you need to consider your entire tax situation prior to jumping to the conclusion that tax breaks are just for someone else. That someone else might just be you, the Standard Deduction taxpayer.

As we approach the end of the year, there’s still time to reduce the taxes you owe in 2020. Here are six ideas that can save money for many taxpayers.

1. Leverage pre-tax savings

Be sure to take advantage of opportunities to set aside income on a pre-tax basis. Some examples of these opportunities include:

• Participation in your employer’s retirement savings program.
• Fully funding Health Savings Accounts (HSA), and “Flex Benefits” accounts that allow you to use pre-tax earnings to pay for childcare and out-of-pocket medical costs. Remember, however, that unlike HSAs it’s important to use up any funds in your Flex health care accounts and dependent care accounts prior to the end of the plan year. Any of these funds not spent by the end of the plan year will be forfeited.
• Taking full advantage of employee benefits like pre-tax child care, parking reimbursements, and any tuition reimbursement programs.
• Paying any health care costs with pre-tax dollars.

2. Defer income and accelerate deductions

When you have the option, think about whether it would be better to reduce taxable income in this year or next year. By understanding which tax year will be more advantageous to you, you can act to defer income into a subsequent tax year and accelerate deductible expenses into the current tax year. On the other hand you may believe tax rates will be higher next year. If this is the case you will want to move income into the current year and defer expenses. Here are some ideas if your strategy is to minimize taxable income this year:

• Delay receipt of a bonus check
• Make an extra house payment
• Make extra charitable contributions (that you would make anyway)*
• Make next year’s church donations this year.*
• Make extra trips to donate non-cash items prior to January 1st*
• Review your investments to book gains and/or losses

*Note: With higher standard deductions, many people will not be itemizing deductions each year. If this is you, consider bundling two or three years of deductions into one year. This is especially beneficial with charitable contributions.

3. Harvest gains and losses

Each year up to $3,000 in investment losses can be used to offset ordinary income. This is done after using the tax code’s netting rules. You can also donate appreciated stock to avoid paying tax on the capital gains of the donation. Make full use of these strategies to make tax efficient moves with any investment gains and losses.

4. Maximize tax-exempt and tax-deferred investments

The higher your tax bracket the more tax savings you’ll realize with tax exempt and tax deferred investments in programs and instruments like employer sponsored 401(k)s, IRA’s, tax-free municipal bonds, and Section 529 College Savings Plans.

5. Make full use of your marginal tax

The U.S. ordinary income tax has seven different tax rates with a maximum rate of 37%. The higher rates are like stairs, you go to the next highest rate instantly, when you pass a dollar amount. Knowing this, make full use of a lower rate until you step up to the next level. Those that are taking money out of retirement accounts should make full use of this idea.

6. Avoid penalties

The penalties for improperly filing and failing to file taxes has increased sharply over the past several years. For example, the minimum failure to file penalty has increased from $100 in 2009 to $435 in 2020. Avoid costly penalties and interest charges by getting your tax records in order now.