William Byrnes' Tax, Wealth, and Risk Intelligence

If a zombie apocalypse does not emanate from the illness known as Covid-19 caused by the coronavirus, then we still need to plan for our 2020 tax payments.  It is likely that taxpayers with business or investment income will be able to reduce the 2020 quarterly estimated tax payments that will be due April 15 this year, June 15, September 15, and January 15 of 2021.  Why?

2019 was a good income year for most taxpayers earning investment and business income.  But 2020 will likely be a depressed income year, maybe even a recession (for those not eaten by zombies). Thus, estimated tax payments to avoid a penalty, generally, 90% of the tax that is estimated to be due for 2020, should be much reduced from the 2019 level paid. (Contrarian investor taxpayers that shorted the market may actually need to make higher estimated taxpayers because the contrarians are likely to have a great capital gain year).

What are the changes enacted in the Tax Cuts and Jobs Act of 2017 that, because of the coronavirus, impact 2020’s estimated tax payments?

• A taxpayer’s ability to reduce tax because of a net operating loss (“NOL”) in 2020 has been reduced by the TCJA. An NOL resulting in 2020 cannot be applied to taxes paid in the previous two-years of 2019 and 2018 to claw those taxes back.  Before the TCJA, the NOL “carry-back” of two-years was allowed.  NOLs may still be carried forward.  Excess NOL in 2020 may be used to reduce 2021’s income and thus tax due.

However, the TCJA even modifies how much NOL may be used to reduce 2020’s taxable income.  Starting in 2018, the TCJA modified the tax law on “excess business losses” by limiting losses from all types of business for noncorporate taxpayers. An “excess business loss” is the amount of a taxpayer’s total deductions from business income that exceeds a taxpayer’s “total gross income and capital gains from business plus $250,000 for an individual taxpayer or $500,000 for married taxpayers filing a joint return.”  Said another way, the business loss in 2020 is limited to a maximum of $250,000 for an individual taxpayer. Yet, the remainder does not evaporate like a vampire stabbed with a stake in the heart.  The remainder may be carried forward to 2021.  The remainder is called a “net operating loss” or NOL.

But the TCJA has another limitation for the carry forward of an NOL.  The NOL may only be used in 2021 to reduce the taxpayer’s taxable income by 80%.  The remainder NOL in 2021, if any, that resulted from 2020’s original loss and 2021’s limitation to just 80% of taxable income may again be carried forward, to 2022, yet again subject to the 80% of taxable income limitation.  The NOL may keep rolling forward indefinitely, subject to the 80% limitation until it is all used.

• High net wealth taxpayers that generate gross receipts greater than $26 million may be subject to the TCJA’s limitation of interest expense for 2020. The TCJA included a rule that limits the amount of interest associated with a taxpayer’s business income when the taxpayer has on average annual gross receipts of more than $26 million since 2018.  The limitation does not apply to a taxpayer whose business income is generated from providing services as an employee, and a taxpayer that generates business income from real estate may elect not to have the limitation apply.

The amount of deductible business interest expense that is above a taxpayer’s business interest income is limited to 30% of the taxpayer’s adjusted taxable income (called “ATI”).  For 2020, ATI will probably be significantly lower than in 2019 and 2018. A taxpayer calculated ATI taking the year’s taxable income then reducing it by the business interest expense as if the limitation did not apply. The remaining amount is then further reduced by any net operating loss deduction; the 20% deemed deduction for qualified business income, any depreciation, amortization, or depletion deduction, and finally, any capital loss.  The business interest expense allowable for 2020 is 30% of that remainder.  The lost business income resulting from the coronavirus in 2020 may lead the remainder to be zero, and 30% of zero is zero.  Like the NOL above, the business interest expense if not usable in 2020 does not vanish. It carries forward to 2021 and each year thereafter, applying the same limitation rules each year.

• Many taxpayers may end 2020 in a capital loss position if the stock market does not fully recover by December.  If a taxpayer’s capital losses are more than the year’s capital gains, then $3,000 of that loss may be deducted from the taxpayer’s 2020 regular income.  Remaining capital loss above the $3,000 may be carried forward to apply against 2021 income, and so on until used up.

• The IRS may offer taxpayers more time beyond the April 15th deadline to file and pay 2019’s tax in 2020.  The filing and payment for 2019, and estimated tax for 2020, is due on or before April 15. But the IRS has indicated that it may extend that deadline.  A taxpayer may, regardless, file a request for a six-month extension on or before April 15, 2020, that is automatically granted if filed on time. But any tax owing for 2019 will still be due April 15, 2020, after which interest begins to be charged by the IRS to the taxpayer’s tax debt.   Check the IRS website here for whether, because of the coronavirus, it has extended the payment deadline beyond April 15, 2020.  Can the IRS extend the deadline, legally? Yes. Because Congress enacted a section of the Internal Revenue Code (our tax law) “§ 7508A” which is aptly named “Authority to postpone certain deadlines by reason of Presidentially declared disaster or terroristic or military actions”.  The President declared an official national emergency (see here).

• Taxpayers are not required to exhaust the deductible required by a high-deductible health plan (called “HDHP”) before using the HDHP to pay for COVID-19 related testing and treatment.

I have four tax policy suggestions for Congress that it can include in a taxpayer coronavirus relief bill. I welcome acronym suggestions for this proposed bill’s name, especially a creative bill name whose acronym is “Zombie” or “Eat Brains”. The four tax relief suggestions that will mitigate damage caused by Covid-19 are:

Proposal 1 (stop medical bankruptcy): In 2020 the itemized deduction for medical expenses is reduced by 7.5% of a taxpayer’s AGI.  For 2020, I propose eliminating the 7.5% reduction of medical expenses attributed to the coronavirus or any 2020 flu (or zombie bite), such as hospitalization.  Medical diagnosis should suffice. Not going to be used by many people.  But the people who do use will really need it – those that do not awake as zombies that is.

Proposal 2 (stop restaurant bankruptcy): The administration proposes the suspension of the Social Security and Medicare payroll tax to jump-start consumer spending, presumably after the removal of quarantine orders to stay indoors or at least six feet away from each other. Not very targeted.  Someone like me may just shift the payroll tax relief and use it instead to upward adjust my 403(b) retirement savings for 2020, taking advantage of my full $19,500 contribution allowance for 2020 (and because I am 50 years old or older – add another $6,000 retirement ‘catchup’ to that $19,500 for a full $25,500),  Not only have I not spent the money to help the economy rebound, I have reduced my tax due for 2020 because my retirement contributions reduce my taxable income.  I have saved tax twice!! While I quite like that idea personally, I feel empathy for all the local restaurant owners who may go bankrupt unless I go out to eat at more local restaurants once I assured that 2020 was not the year of the zombie apocalypse.

A better-targeted proposal to save our nation’s local restaurants and the local farmers that supply them is to allow taxpayers an itemized deduction up to $1,000 for an individual and $2,000 for a married filing jointly 2020, beyond the standard deduction, of 100% of restaurant meals expense between June 1 and October 31, at U.S. restaurants with the last three years gross annual receipts averaging less than [$5 million – whatever is reasonable so that big chains are not included, Small Business Administration uses a maximum of $8 million for full-service restaurants (NAICS 722511)- I’m OK with that].  I know – many reasons not to do this, such as Americans will become hooked on eating out at local restaurants. Wait, why is that a bad thing?  And we will need to address the tax abusers who will order one slice of pizza and 20 bottles of wine, to go. So maybe the maximum meal receipt must be set at $100 per meal receipt per adult. That should allow plenty of food for a couple, and alcohol, and leave enough for the children to still have mac & cheese. Plus it requires ten different restaurant trips. Local restauranteurs and the local farmers can hold out hope that 2020 will not require filing for bankruptcy protection.  November is Thanksgiving when people eat out anyway, at least in the restaurants that have remained open.  By the way, I am purposely leaving business out of this.  Business has a 50% business meal deduction anyway. And my policy suggestion is about Americans being social and not talking business at the dinner table (and perhaps not politics either).

Proposal 3 (stop hotel bankruptcy): And let’s not forget about locally-owned hotels with average gross receipts below $8 million (SBA uses $35 million for hotels and $8 million for B&B Inns so maybe I am way off base with just $8 million – see NAICS subsector 721 Accomodation). A $500 itemized deduction for 2020 for a U.S. hotel stay (not Air BnB homes or apartments, actually licensed hotels/BnB Inns) for an individual or couple between June 1 and October 31. Might not buy a weekend at the Ritz but the Ritz probably exceeds the small business amount of revenue a year.  Is it sound tax policy? Huey Long (I’m from Louisiana) promised a chicken in every pot and a car in every yard.  I promise a get-a-way weekend at a small(ish) hotel.

Proposal 4 (keep employees employed): A tax credit (I am not sure the right amount, let the Labor Secretary decide, something around $5,000 an employee) to employers of less than 500 employees who do not reduce the monthly payroll of the employees, or fire any employees, between June 1 and September 30. October 1 employers start thinking about Christmas hiring for the shopping season.  I can imagine some mathematically-inclined employees thinking “I am going to walk into my boss’ office and projectile vomit because the cost of losing the tax credits for firing me is too high.” OK, so firing ‘for cause including projectile Zombie vomiting on the boss ‘ will be allowed without loss of the tax credit.  Now if a business wants to expand and hire a lot of employees up to 500 that’s great.  I propose that all employees employed and start fulltime work before June 1st qualify for a reduced $4,000 tax credit (basically $1,000 a month of employment for June through September).

These four proposals are enough to keep the economy, restaurants, hotels, and employees out of recession and bankruptcy.  But I have more proposals not currently part of the current bill, but common sense dictates should be (well, maybe not).  Why have we heard nothing from the House to encourage donations of toilet paper rolls to local shelters?   And why hotels and restaurants, but not spas?  I’ll leave it to the politicians (and lobbyists) to argue about.  Meanwhile, I look forward to receiving your comments while I set up my anti-zombie chicken wire barricade around the yard.

I’ll be covering these and related issues in my weekly Tax Facts Intelligence Newsletter.

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