Rising Taxes Means Tax Planning Should be Top of Mind
It’s no secret that the COVID-19 crisis has sent shockwaves through almost every facet of the American economy, and the world of personal finance has not been immune. As the pandemic has dragged on, people have started to wonder how it will affect them in the long term — especially when it comes to taxes.
Possible Tax Increases
One major source of speculation is a short- to mid-term rise in state and local taxes to compensate for the massive expense that local governments have incurred while fighting the pandemic. The CARES Act that provided huge amounts of funding to individuals and businesses left states and localities notably out of the planning, so they had to foot their own bills for unemployment payments, small business support, and health care.
As a result, many states and cities are going to find themselves in pretty deep water. According to an article from April, state coffers are likely to face an aggregate deficit of more than $105 billion this year, which might balloon to $290 billion next year. Though we don’t know of any bills on the books right now, there’s a chance that states and cities will try to recoup some of those losses with tax bills. Here’s where you might see increases:
- Corporate income: if you normally commute across state lines, states might argue that working from home constitutes working in your home state, and they’ll want a piece of the money you’ve been earning from the home office.
- Online purchases: ordering online has skyrocketed in the last six months, and it’s likely to stay that way until this whole crisis passes. Most states set their thresholds for taxation fairly high — $100,000 and 200 transactions — but those levels might drop.
- Property tax: in a recession, property taxes are relatively stable. People don’t move much and property values are relatively consistent, so raising property taxes is a predictable way to bring in money. The concern is that a rising unemployment crisis might make people unable to pay their property taxes.
- Gross receipts: most states tax businesses based on their profits, but some might consider taxing their total revenues before expenses — that way, a state would still make money off a business that isn’t profitable.
Tax Implications of COVID-19
Future taxes are purely speculative, but there are a few changes that have already come through that we can tell you about. The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, has had some pretty substantial effects on business owners and individuals alike. For example:
- It has eliminated the taxable income limit for net operating losses, allowing businesses hit the hardest to recoup some of their losses through tax breaks
- The law has also allowed businesses to carry back their net operating losses (NOLs) arising in 2018, 2019, and 2020 to the five previous years
- Excess business loss rules have been suspended
- Refunds of corporate AMT credit have been accelerated to help businesses with their cashflow
- Business interest limitation 163j, which normally limits business interest expense deductions, has been loosened to allow business to claim greater deductions on interest expenses
The Paycheck Protection Program (PPP)
If you own a business, you’ve probably made an effort to obtain a loan through the PPP, but you might be worried how it will affect your tax bill going forward. The news is mostly good — the amount of the loan isn’t taxable, and it’s fully forgiven if you spend at least 75 percent of the loan on payroll expenses (though you still have to apply for forgiveness).
Keep in mind, though, that the loan might mean your taxable revenue is higher than you anticipated. The CARES Act also implemented the Employee Retention Tax Credit, which allows you to claim a tax credit of up to 50 percent of wages paid to workers between March and July, but you can’t claim the ERTC if you also received a PPP loan, so keep that in mind.
Talk to First Western Trust
There’s no denying it — this has been a very weird year financially for everyone, whether you’re a sole proprietor, a business owner, or retired. We still don’t know what laws will pass on a federal, state, or local level to affect your finances in the next few months or years, but what we can do is help you navigate the changes that have already occurred.
If you’re feeling overwhelmed by the changes that have been made to the tax code or to your business’ finances in the last few years, get in touch with First Western Trust Bank today. We can take a holistic, detailed look into your finances, goals, and priorities to come up with a financial plan that’s right for you.