By Adam Cmejla, CFP®
August 19, 2020
We often hear in business that “it’s not what you make, it’s what you keep that matters.” The COVID-19 pandemic has amplified the importance of making smart decisions about the money generated by your practice.
While the shutdown that occurred in the spring certainly impacted practices in multiple different ways, the vast majority of practices are back in the office, all adapting to the “new normal” of patient care.
However, as business owners, the “new normal” has also added an additional responsibility of how to think about cash flow and tax planning in the COVID-19 era. The CARES Act created trillions of dollars in liquidity in an unprecedented amount of time, both in the form of injecting liquidity into the economy (think PPP and EIDL), as well as through tax credits, deferments and previous tax law changes.
Practice owners are now tasked with understanding how to manage cash flow and profitability through the latter part of the year, and understanding which parts of the CARES Act may still be advantageous to consider evaluating with their professional advisory team.
Section 127/Student Loan Reimbursement Program
Section 2206 of CARES amended and expanded Section 127 of the Code to include the opportunity to use funds that are paid out of a Section 127 plan to be used to pay down student loan balances.
Section 127 plans have been around for decades and they are primarily used as a way to help employees with educational assistance as they are going through school, not as a reimbursement tool. Because of this, student loans were never able to be paid back with Section 127 dollars.
Other Articles to Explore
CARES amended this to allow practices to allocate up to $5,250 to be used to pay down student loan balances, however there are conditions of this program that must be met. Those include:
1. The $5,250 is cumulative for student loans AND higher education; no double-dipping.
2. The funds must be paid and received by 12/31/2020.
3. The program must be documented in the practice with ample notification given to team members.
4. You cannot discriminate to highly compensated employees–everyone must be eligible for the program.
5. No more than 5 percent of amounts paid under the plan paid by the employer for educational assistance during the year can be provided for individuals who own more than 5 percent of the company.
6. Cannot provide this in lieu of other benefits.
Number 5 will frustrate practice owners because it means that they will not be able to reap the benefits of the program personally.
However, all is not lost. There’s still a benefit to the employer because funds that are paid out of a Section 127 plan are not subject to FICA taxes. Assuming that you paid out a full benefit of $5,250 to an associate doctor, that’s a $401 employer tax saving.
Net Operating Losses
While we’d like to think that businesses make money every single year, unfortunately that’s not always the case, especially for newer, cold-start practices. In those years, it’s very possible to have a practice operating at a loss, which means that the business has NOLs (net operating losses). These losses are then carried forward in future years and are used to offset future gains.
However, if a business has a year in which they experienced a loss on paper (due to certain accounting strategies), you were not allowed to carry BACK those losses and amend previous returns to reduce previous year(s)’ tax liabilities.
CARES changed that. Under CARES, NOLs can help practices improve cash flow by doing the following:
• Provides a five-year carry-back for losses earned in 2018, 2019 or 2020. This allows practices to modify tax returns up to five years prior to offset taxable income in those years.
• Suspends the NOL limit of 80 percent of taxable income. This change allows practices to offset 100 percent of their taxable income in a given year.
• Pass-through business owners may use NOLs to offset their non-business income above the previous limit of $250,000 (single) or $500,000 (joint) for 2018, 2019 and 2020.
Bonus Depreciation and 179 Expense “fix” from Tax Cuts & Jobs Act (TCJA)
Despite the challenges of running a practice during the COVID-19 pandemic, many practices we serve are still executing on their business plans and growth intentions. This means the purchase of additional equipment and other capital improvements.
A notable section of CARES creates a fix around the ability to elect bonus depreciation around QIP (qualified improvement property) in your practice. QIP can be defined as any improvement to an interior portion of a building which is (a) non-residential real property and (b) doesn’t increase the physical size of the building, (c) does not include an escalator or elevator, and (d) does not include the internal structural framework of the building
Prior to CARES, the Tax Cuts and Jobs Act failed to assign a 15-year recovery period for qualified improvement property, instead making it 39-year property, and thus, ineligible for bonus depreciation.
CARES fixed that, now allowing 15-year property to be eligible for bonus depreciation. This means that you can choose to bonus depreciate QIP. Doing this can significantly reduce your 2020 tax bill because you’re accelerating depreciation that otherwise would be captured over potentially 15 years all into one year. It’s important to plan accordingly for this in future years, though, knowing that you won’t have that additional depreciation expense to offset your income.
With Congress contemplating another round of stimulus funding due to the continued COVID pandemic, these planning strategies continue to be fluid. Discussing these strategies with your professional advisory team, and putting actionable timelines in place, can ensure you capitalize on the strategies that make the most sense for your situation.
Adam Cmejla, CFP® is a CERTIFIED FINANCIAL PLANNERTM Practitioner and Founder of Integrated Planning & Wealth Management, LLC, an independent financial planning & investment management firm focused on working with optometrists to help them reach their full potential and achieve clarity and confidence in all aspects of life. For a number of free resources, visit https://integratedpwm.com/ebooks/ and check out the “20/20 Money Podcast” on your favorite podcast platform to get more tips on making educated and informed financial and business decisions.