By Zach Mayer, senior vice president-strategic finance, Foundation Partners Group
As the old saying goes, nothing is certain in life but death and taxes – two subjects quite familiar to those in our profession. As we settle into the new year and tax filing deadlines approach, it’s time to think about tax planning and the impact of tax legislation, which may be on the horizon. As always, consult your tax professional before making any major tax-related decisions.
Tax 101 – Key Dates and Deductions
First, let’s clarify the standard annual deadlines and increases on tap for 2021.
- If you own an S corporation or partnership, your 2020 taxes are due Monday, March 15, 2021.
- Tax day for individual employees and sole proprietors is Thursday, April 15, 2021.
- If you own a C corporation, your tax filing day may vary so check your corporate resolution.
- For flow-through entities and employees paying taxes as individual filers, the standard deduction for 2020 increased to $12,400 for single filers and $24,800 for married couples filing jointly. In addition, income tax brackets increased modestly in 2020 to account for inflation.
CARES Act Changes
The Coronavirus Aid, Relief and Economic Security Act contains a number of changes to the tax code that affect funeral service business owners in 2020 and 2021:
Charitable deduction increase: The CARES Act increased deductions for charitable contributions to 100% of your adjusted gross income for 2020. Deductions will reset in 2021 to the prior level established in the 2017 Tax Cuts and Jobs Act, which is 60% of your adjusted gross income through 2025.
PPP loan forgiveness: More than $525 billion in Paycheck Protection Program loans has been allocated to over 5.2 million American small businesses in 2020 and 2021. As long as loans were used on approved business expenses – e.g., payroll, rent and mortgage interest – they were designed to be forgiven by the government. So far, the news is good in that over 85% of these PPP loans have been forgiven as intended and are deemed completely tax-exempt. PPP funds used for non-approved expenses, however, cannot be deducted from taxable income.
Recent legislation simplified the forgiveness process for borrowers. The Economic Aid to Hard Hit Small Businesses, Nonprofits and Venues Act, passed in late December, created a second round of forgivable loans and simplified PPP loan forgiveness for borrowers of $150,000 or less. It now may be as simple as providing high-level information on a one page form, but you still must keep employment records for four years and other PPP-related documentation for three years.
Employee retention credit: If your business did not receive a PPP loan, the CARES Act allows for federal payroll taxes to be refunded to employers, subject to certain qualifications and restrictions. The refund equals 50% of eligible employee wages paid between March 13 and Dec. 31 2020, subject to a maximum of $10,000 per employee. Credit is available to funeral homes where a governmental authority limited local gathering (such as a restriction on in-person services), and/or employers that had a greater than 50% decline in revenue in any 2020 quarter as compared to the same period in 2019.
Payroll tax deferral: The CARES Act also allows employers to defer 50% of the Social Security tax component of FICA tax to 2021, with the remaining 50% payable Dec. 31, 2022. This is limited to the first $137,700 of an employee’s 2020 wages paid between March 27 and Dec. 31. Similar rules are in place for self-employment taxes for self-employed individuals.
NOL rules: Net operating losses can be used to offset prior and future year taxable income. The 2017 Tax Cuts & Jobs Act removed the two-year carry back period, but allows future carryovers for an unlimited number of years up to 80% of taxable income in the carryover years. The CARES Act allows taxpayers to carry back NOLs arising in tax years beginning in 2018, 2019 or 2020 for five years and suspends the individual taxpayer excess business loss limitation rule for those same tax years.
Unemployment insurance: Funeral home employee unemployment insurance benefits received during 2020 are taxable if you did not elect to have taxes withheld from benefits when you signed up.
New Tax Implications
If you’re thinking of selling your business, you’ll want to keep an eye on proposals for new tax legislation. Single party control in Washington, D.C., albeit by a slim majority, increases the likelihood of new taxes and reversals or modifications of the 2017 tax reforms including:
Income taxes: Current proposals call for an increase in the corporate tax rate to 28% from 21% and restoration of the top individual tax rate to 39.6% from 37%. In addition, wages above $400,000 would be subject to the Social Security tax.
Capital gains taxes: An increase in the long-term capital gains tax rate could reduce net proceeds if you sell your funeral home. The new administration has publicly proposed increasing the top capital gains tax to 39.6%, the same as individual tax rate. This represents a 98% increase over the current highest marginal rate. If enacted at these proposed rates, a funeral home owner who sells his or her business with a tax basis of $1 million and realizes a taxable gain of $4 million will pay up to $500,000 in federal income tax – effectively reducing net proceeds by more than 10%.
Inheritance/estate taxes: The Biden administration has proposed reducing the estate and gift tax exemption to $5 million from $11 million and removing the step-up tax basis benefit that heirs receive when inheriting businesses from older generations, which could significantly increase taxable gains to younger generations planning to inherit and operate the family funeral home.
Remember that retroactive changes to tax codes are rare, and usually limited to tax reductions. It’s also unlikely that all of these proposals will become law in their current form. Finally, any increases will most likely not take effect before Jan. 1, 2022, but we cannot be certain.