In late December, Congress passed the Consolidated Appropriations Act, which in addition to providing COVID-19 relief provisions also included many tax provisions and extenders. The Act contained many COVID-related tax provisions, as well as a slew of extenders ranging from one year to permanent. This article will focus on the miscellaneous tax and disaster relief provisions, which are more applicable to most taxpayers.
Charitable Contributions – For tax years 2020-2022, non-itemizers can deduct $300 in charitable contributions ($600 for married couples filing jointly).
Full Business Meals Deduction – Typically, business meals are only 50 percent deductible; however, the new tax law provides for a 100 percent deduction for restaurant meal expenses incurred in 2021 and 2022.
Low-Income Housing Tax Credit – Starting in 2021, a 4 percent rate floor is established for calculating credits related to the acquisition of and bond-financed low-income housing developments.
Minimum Interest Rate for Certain Life Insurance Contracts – The bill ties the rates going forward for section 7702 fixed interest rates for life insurance contracts to benchmark interest rates that are periodically updated.
Minimum Age for Distributions – Certain qualified pensions can make distributions to workers who are 59½ or older and still working, with a special allowance for some construction and building trade workers, where the age is lowered to 55.
Modified Charitable Contribution Limits – An extension for one year through 2021 is given for CARES Act increased limits on deductible charitable contributions for corporations and taxpayers who itemize.
Disaster tax relief provisions are available for individuals and businesses in presidentially declared disaster areas on or after Jan. 1, 2020, up through 60 days after enactment.
Use of Retirement Funds – Residents of qualified disaster areas can take up to $100k in qualified distributions from retirement plans or IRAs, penalty-free. Taxpayers have up to three years to pay the distributions back without penalty.
Disaster Zone Employee Retention Credit – A tax credit of up to 40 percent of wages (capped at $6,000 per employee) is available to employers who are actively engaged in a trade or business in a qualified disaster zone.
Disaster Relief Contributions – Corporations are allowed qualified disaster relief contributions of up to 100 percent of their taxable income for 2020.
Aside from the miscellaneous and disaster relief provisions, the act extended numerous existing tax laws anywhere from one to five years or even permanently. Below is a list of the extended provisions. Due to the number of extender provisions, only a table is provided below.
- Sec. 25C 10% credit for qualified nonbusiness energy property.
- Sec. 30B credit for qualified fuel cell motor vehicles.
- Sec. 30C 30% credit for the cost of alternative (nonhydrogen) fuel vehicle refueling property.
- Sec. 30D 10% credit for plug-in electric motorcycles and two-wheeled vehicles.
- Sec. 35 health coverage tax credit.
- Sec. 40(b)(6) credit for each gallon of qualified second-generation biofuel produced.
- Sec. 45(e)(10)(A)(i) production credit for Indian coal facilities.
- Sec. 45(d) credit for electricity produced from certain renewable resources.
- Sec. 45A Indian employment credit.
- Sec. 45L energy-efficient homes credit.
- Sec. 45N mine rescue team training credit.
- Sec. 163(h) treatment of qualified mortgage insurance premiums as qualified residence interest.
- Sec. 168(e)(3)(A) three-year recovery period for racehorses two years old or younger.
- Sec. 168(j)(9) accelerated depreciation for business property on Indian reservations.
- Sec. 4121 Black Lung Disability Trust Fund increase in excise tax on coal.
- Sec. 6426(c) excise tax credits for alternative fuels and
- Sec. 6427(e) outlay payments for alternative fuels.
- The American Samoa economic development credit (P.L. 109-432, as amended by P.L. 111-312).
- Sec. 25D residential energy-efficient property credit (the bill also makes qualified biomass fuel property expenditures eligible for the credit).
- Sec. 45Q carbon oxide sequestration credit (through 2025).
- Sec. 48 energy investment tax credit for solar and residential energy-efficient property.
- Sec. 45D new markets tax credit.
- Sec. 45S employer credit for paid family and medical leave.
- Sec. 51 work opportunity credit.
- Sec. 108(a)(1)(E) gross income exclusion for discharge of indebtedness on a principal residence.
- Sec. 127(c)(1)(B) exclusion for certain employer payments of student loans.
- Sec. 168(e)(3)(C)(ii) seven-year recovery period for motorsports entertainment complexes.
- Sec. 181 special expensing rules for certain film, television, and live theatrical productions.
- Sec. 954(c)(6) lookthrough treatment of payments of dividends, interest, rents, and royalties received or accrued from related controlled foreign corporations under the foreign personal holding company rules.
- Sec. 1391(d) empowerment zone designation.
- Sec. 4611 Oil Spill Liability Trust Fund financing rate.
- Sec. 1397A increased expensing under Sec. 179 and Sec. 1397B nonrecognition of gain on rollover of empowerment zone investments are both terminated for property placed in service in tax years beginning after Dec. 31, 2020.
- The Sec. 1394 empowerment zone tax-exempt bonds and Sec. 1396 empowerment zone employment credit, which expire Dec. 31, 2020, were not extended.
- Sec. 213(f) reduction in medical expense deduction floor, which allows individuals to deduct unreimbursed medical expenses that exceed 7.5% of adjusted gross income instead of 10%.
- Sec. 179D deduction for energy-efficient commercial buildings (the amount will be inflation-adjusted after 2020).
- Sec. 139B gross income exclusion for certain benefits provided to volunteer firefighters and emergency medical responders.
- Sec. 45G railroad track maintenance credit; however, the credit rate is reduced from 50% to 40%.
The Consolidated Appropriations Act passed in December 2020 not only extended many existing tax laws and instituted COVID-19 relief, but it also changes many typical tax laws (at least temporarily). Taxpayers should pay attention to these year-end tax law changes as they can significantly impact their tax situations.
According to the World Bank Group, for businesses in emerging markets and developing economies, the bottom fourth percentile of the non-financial corporate (NFC) sector saw their balance sheets deteriorate. Looking at these businesses’ Interest Coverage Ratio, the average figure dropped to 0.06 from 0.35 between the fourth quarter of 2019 and in the midst of the coronavirus pandemic’s ongoing effects.
The ICR is a measure of a firm’s ability to repay their debt in accordance to existing obligations, whereby a higher ratio indicates a better ability to do so. This is calculated by dividing earnings before interest and taxes by Interest expense.
With businesses seeing losses of as much as three-quarters of revenue in a three-month timeframe, as McKinsey & Company explains, a “cash war room” needs to be established to address this liquidity crisis. McKinsey & Company wants companies to look at every possible way to improve their financial situation due to their experience with the COVID-19 pandemic.
Cash and Sales Collections
One of the first things McKinsey & Company recommends doing is evaluate current and future cash collections and sales collections. If there’s a large percent of overdue or chronically overdue invoices, shifting employees to collections may provide substantive positive cashflow. However, if a business’s working capital is insufficient, other aspects of the balance need to be addressed to increase business health.
Tackling Debt Obligations
Whether it’s used to maintain operations or for ongoing investments, debt can be a useful tool. However, if a company takes on too much debt and is hit by an unexpected event like the COVID-19 pandemic, severely reducing sales, debt can become a burden for the company. Along with increasing the level of risk for investors, if a company can’t reduce its debt load eventually, it could be forced to declare bankruptcy or default on loans.
However, there are a few things a business can do to tackle its debt. Publicly traded companies can offer more shares for sale. Businesses can contact their lenders to see if interest rates can be lowered, payments can be frozen or spread out over longer timeframes. Reducing staff levels or renegotiating leases on machines or real estate also can free up excess cash burn.
According to the Office of the Comptroller of the Currency, part of the U.S. Department of the Treasury, a March 2020 report titled “Small Business Road Map to Financial Resources” revealed that crowdfunding might be a good alternative to taking on additional loans. Whether a business owner or entrepreneur, they can exchange “token rewards” for donations from individuals without sacrificing any interest in their company’s ownership.
Improve the Balance Sheet’s Current Ratio
Another way to improve one’s balance sheet is to determine the company’s current ratio and make adjustments accordingly.
Looking at the formula, Current Ratio = Current Assets / Current Liabilities, businesses can get an answer quickly.
If the ratio is below 1, then there needs to be some attention paid to figuring out how to better pay debts needed to be paid within 12 months, or short-term liabilities, with current assets or assets convertible to cash within the same timeframe.
Use a sweep account, which is a bank account that transfers money not needed for day-to-day operations into a different, but easily accessible account that earns more interest. Other ways include reducing the need to rent additional space, using machines/cloud services less often, and dialing back labor/marketing.
Taking action, including these for balance sheet health, can increase the chance of business survival during the pandemic and beyond.
About four in 10 Americans (41 percent) look positively toward single-party control at the national level, according to an October 2020 Gallup annual governance survey. This is compared to 23 percent of respondents desiring multiparty control. Breaking it down by party, 43 percent of Democrats want single-party rule, while 52 percent of Republicans desire single-party governance.
One notable finding is that, looking back to 2002, 32 percent preferred single-party control when it comes to independents. This was the highest-ranking over the past 18 years. As the Brookings Institution points out, now that Jon Ossoff and the Rev. Raphael Warnock are U.S. Senators, the U.S. Senate is divided 50-50 with Vice President Kamala Harris able to break a tie. According to political experts’ forecasts, President Joe Biden is likely to accomplish much of his agenda in light of these circumstances.
However, as the Brookings Institution notes, many are expecting West Virginia Sen. Joe Manchin to be the deciding vote on many upcoming pieces of legislation in 2021. His track record proves he’s been a wildcard depending on the legislative topic at hand.
When Manchin was West Virginia’s governor from 2005 to 2010, he lowered taxes, gave teachers higher salaries, helped repair the state’s worker compensation system, and reduced the state’s overall liabilities. He’s opposed to adding additional justices beyond nine (other than replacing justices who have retired or passed away) and is against reducing funding for public safety needs. Yet, he did not support President Trump’s tax cuts in 2017, nor did Manchin have any interest in reducing the scope of the Affordable Care Act.
President Biden Tax Proposals
If President Biden’s proposed legislative priorities on the campaign become a reality, they will undoubtedly impact personal and publicly traded companies’ earnings. According to The Tax Foundation, Biden proposes increasing the highest personal marginal income tax rate to 39.6 percent from 37 percent. He’s also expected to advocate changing the highest corporate income tax rate from 21 percent to 28 percent.
Additional proposals include taxing capital gains at 40 percent for those who earn $1 million or more, along with The Tax Foundation reporting the potential for at least a tax of 15 percent on income that publicly traded companies disclose on financial statements available to equity holders.
Implications of Tax Cuts (and a Lack Thereof)
According to Stanford Graduate School of Business and research done by Rebecca Lester, associate professor of accounting at Stanford Graduate School of Business, there are some insightful findings on how tax policy impacts corporations’ bottom lines.
One of the primary findings is that while companies take some of the increased savings from fewer taxes and deploy it outside the United States when it comes to using it domestically, it’s used for automation, not to create additional employment opportunities.
For example, the Domestic Production Activities Deduction (DPAD) gave companies a tax deduction that would essentially lower their income tax obligations on earnings from domestic manufacturing. However, there was no requirement to increase domestic manufacturing or employ more Americans.
Based on this example, companies cannot only save money directly from the tax cuts but also indirectly through long-term gains via automation. Looking forward to how a Biden Presidency will shape corporate earnings and the resulting market performance will likely depend on how a few moderate Senators vote.
The Federal Reserve recently reported that the 50 richest people in the United States increased their net worth by $339 billion during the first half of 2020. There are two primary contributors to this near-unprecedented level of growth. The first is that many either owned or were heavily invested in tech companies that thrived during the pandemic. Increased technology demands for remote work, online shopping, streaming entertainment, and socially-distanced socializing created a lucrative COVID-19 economy in some sectors.
Another reason is that the U.S. Treasury and Federal Reserve proactively infused the economy with stimulus capital. That helped mitigate long-term market disruption that might have otherwise occurred.
The short explanation of how to leverage assets for greater wealth during a pandemic is to be well-capitalized and invested in the stock market. To wit, over 88 percent of the equity in corporations and in mutual fund shares is owned by the wealthiest 10 percent of Americans. In other words, they’re not sitting on their cash; it is continually working for them.
In fact, nearly every tragedy has some form of silver lining investment opportunity. For example, hurricanes, floods, tornadoes, and earthquakes are good for the construction and contracting industries. The pandemic is interesting because it has large and almost exclusively benefited technology companies – in as much as they serve other industries.
The obvious pandemic winners are streaming services such as Amazon and Netflix, but also consider the proliferation of video conference technologies, online financial services, and telemedicine. All of these innovations existed before COVID-19, but it took a global pandemic for them to become mainstream services. Moreover, it is unlikely that their popularity will wane once the virus is contained. After all, we love convenience, and few things are more convenient than being able to conduct daily activities – such as work and doctor’s appointments – from the comfort of your own home.
But just as the coronavirus boosted fortunes in many market sectors, it depressed others, such as cruise lines, movie theaters, and airline stocks, as well as oil prices. Unless you have a crystal ball, it’s always a good idea to diversify your portfolio across a variety of asset classes and market sectors. That way losses in some investments are likely to be offset by gains in others.
In recent years, the wealthy also have benefited from generous tax breaks provided by the Tax Cut and Jobs Act. To diversify gains achieved during the pandemic, they may take advantage of provisions from this legislation, such as the conservation easement charitable deduction. This can be claimed when purchasing land with strong development potential and then donating it to a land trust or government agency. This might create a higher tax deduction based on the appraised value. A similar approach can be used with the Opportunity Zone tax break. This eliminates taxes on capital gains earned from long-term investments in businesses or developments in specific low-income areas of the country.
Rest assured, while vaccines will lead the way to recovery from the pandemic, other crises will follow – as will opportunities to make money on them. Some of them are even easy to predict. After all, the exacerbation of climate change is evident in the increase and severity of extreme weather events. This offers two avenues for an investment opportunity. The first is reactive, such as rebuilding what has been damaged or destroyed. The second is preventive, which means investing in renewable energy resources that reduce carbon emissions, such as solar, wind, hydro, tidal, geothermal, and biomass energy solutions.
It is important to recognize, however, that we can’t always predict what type of crisis will happen next. Therefore, it is inadvisable to try to time the market for investments, particularly when saving for a long-term goal such as retirement. Instead, consider aligning your assets with investments that help build a stronger society, such as sustainable energy, technology advances, and healthcare innovation.
The biggest takeaway here is that the key to crisis opportunism is to be well-capitalized with liquid assets that can repositioned quickly. It is no accident that economic declines are often most advantageous to the extremely wealthy. If you were able to save more money during the pandemic due to less opportunity to travel or spend on other indulgences, consider using this windfall to position your investment portfolio for crisis opportunism in the future.
Right now with everything that’s going on, navigating your finances might feel overwhelming. However, there are some strategies that will help you manage cash shortfalls. Mariel Beasley of Duke University’s Common Cents Lab offers ways to help you manage during these trying times.
Use Mental Accounting
Translated, this means prioritizing what’s most important and cutting back in those areas that aren’t. While pretty obvious, the finer point according to Beasley is this approach will help you stick to your spending plan by reminding you of your opportunity costs — i.e. what trade-offs you might be making with each purchase. For instance, you might not be able to buy that special something you’ve had your eye on, but you will be able to buy food. Here are the three buckets she recommends for your budget:
- Your Bills: Non-negotiable monthly bills like rent, mortgage, utilities, child care, car payment, insurance, phone, and internet.
- Weekly Expenses: These costs might vary, but they include groceries, gas, food delivery, and other miscellaneous expenses.
- Future Expenses: What’s leftover after you pay your bills and current expenses? Even if you think you don’t have much left, set aside this cash for an emergency fund or retirement savings in high-yield saving accounts like the American Express® High Yield, or Marcus account by Goldman Sachs. Alliant Credit Union even offers a 0.55 percent interest rate on savings accounts. By comparison, the national savings average is 0.05 percent APY. Make sure your money works as hard as it can.
Try Per-Spend vs. Per Month
Instead of budgeting $200 for groceries for the whole month, decide how many times you’ll go to the supermarket during the month (five times), then stick to a per trip budget ($40). You might not spend as much as you think you will. (Tip: Buy store brands, as they’re cheaper and just as good.) Whether you work a job that pays you regularly, you’re on unemployment or you’re living on Social Security, Beasley says that this will help you stretch your money longer between paychecks.
This might seem like a no-brainer, but it bears repeating. Instead of waiting until you’re at a crisis point, act now to protect yourself. Here are some ways to do this:
- Identify Local Food Pantries. Feeding America is a nationwide network that helps you locate a food bank near you. Organizations such as churches and charities are also pitching in, offering everything from food donations to job search assistance. Government programs such as SNAP (food stamps) and Medicaid are options, as well as HEAP (heating your home), should you need something like this.
- Have a Plan for Your Rent/Mortgage. If you’re concerned about eviction, understand your rights as a tenant, and most importantly, stay in communication with your landlord. One solution is to get a roommate to share expenses. If you’re running behind on your mortgage, seek out help from your mortgage broker. One way to generate income is to rent out an extra room in your home. If you have family or friends who can help, reach out to them. While the latter might feel like a last resort, you could consider bartering: provide a service to them they might usually pay for like car washes, dog walking, or house cleaning in exchange for the financial help.
- Talk to Your Creditors. Contact your creditors to see if you can get a reduced interest rate on any of your payments. You also might ask for discounts and deferment options. Many card issuers are offering financial hardship assistance (waived late fees, flexibility with payments, even skipped payments) during the coronavirus pandemic.
The key to all this is slowing down and focusing on the basics – getting through each week and each day. While the pandemic might feel like it will never end, it will: it’s inevitable. Until then, these tactics can help you take control and stay afloat.
Coronavirus: Credit Card Issuers Offer Financial Assistance (cnbc.com)