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2020 Year-End Tax-Planning Moves for Businesses & Business Owners

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2020 year end is now!  There is still time to consider final moves for tax planning purposes that you as a business owner may want to take.  Below is a summary of strategies that are recommended. If you want to consider these or look at more advanced tax strategies, be sure to contact us today!

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2020, if taxable income exceeds $326,600 for a married couple filing jointly, $163,300 for singles, marrieds filing separately, and heads of household, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income between $326,600 and $426,600, and to all other filers with taxable income between $163,300 and $213,300.

Taxpayers may be able to achieve significant savings with respect to this deduction, by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2020. Depending on their business model, taxpayers also may be able increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so don’t make a move in this area without consulting your tax adviser.

An analysis of electing S Corporation is something our firm can perform to determine if your Company would fit this model or is better suited in another model or it’s current model.  A variety of considerations go into the analysis in determining if moving to an S Corporation for tax purposes makes sense.

More small businesses are able to use the cash (as opposed to accrual) method of accounting in than were allowed to do so in earlier years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test. For 2020, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts don’t exceed $26 million (the dollar amount was $25 million for 2018, and for earlier years it was $1 million for most businesses). Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.

Businesses should consider making purchases that qualify for the accelerated depreciation options. For tax years beginning in 2020, the depreciation limit is $1,040,000, and the investment ceiling limit is $2,590,000. The expense is generally available for most capital property and off-the-shelf computer software. It is also available for qualified improvement property (generally, any interior improvement to a building’s interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.

The generous dollar thresholds mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for certain vehicles, machinery, and equipment. What’s more, the depreciation deduction is not prorated for the time that the asset is in service during the year. The fact that the deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is in service during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2020, rather than at the beginning of 2021, can result in a full deduction for 2020.

The consideration is if the deduction is not needed, the asset could either be placed in service in 2021 or the depreciation will be taken over the allowed life of the asset giving you a tax benefit each year for 3, 5, 7 plus years.

Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment bought used (with some exceptions) or new if purchased and placed in service this year, and for qualified improvement property, described above as related to the depreciation deduction. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2020.

Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500. Where the UNICAP rules aren’t an issue, consider purchasing such qualifying items before the end of 2020.

A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for 2020 (and substantial net income in 2021) may find it worthwhile to accelerate just enough of its 2021 income (or to defer just enough of its 2020 deductions) to create a small amount of net income for 2020. This will permit the corporation to base its 2021 estimated tax installments on the relatively small amount of income shown on its 2020 return, rather than having to pay estimated taxes based on 100% of its much larger 2021 taxable income.

To reduce 2020 taxable income, consider disposing of a passive activity in 2020 if doing so will allow you to deduct suspended passive activity losses.  A typical passive activity would be investment real estate or investment in a business that you have no participation.

These are just some of the basic year-end steps that can be taken to save taxes. There are a number of expired tax regulations that have been reconsidered due to COVID-19 that could potentially save you in taxes from prior years.  Again, by contacting us, we can tailor a particular plan that will work best for you and provide a prior year tax review for free!

2020 Tax Planning Moves for Individuals

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Now, as year-end approaches, is a good time to think about planning moves that may help lower your tax bill for this year and possibly next. Year-end planning for 2020 takes place during the COVID-19 pandemic, which in addition to its devastating health and mortality impact has widely affected personal and business finances.

We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make…

-Higher-income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI. An important exception is that NII does not include distributions from IRAs and most other retirement plans.

-Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $80,000 for a married couple).

If the 0% rate applies to long-term capital gains you took earlier this year for example, you are a joint filer who made a profit of $5,000 on the sale of stock held for more than one year and your other taxable income for 2020 is $75,000 then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses won’t yield a benefit this year. (It will offset $5,000 of capital gain that is already tax-free.)

-Postpone income until 2021 and accelerate deductions into 2020 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2020 that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2020. For example, that may be the case for a person who will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or who expects to be in a higher tax bracket next year.

-If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA in 2020 if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2020, and possibly reduce tax breaks geared to AGI (or modified AGI).

-It may be advantageous to try to arrange with your employer to defer, until early 2021, a bonus that may be coming your way. This could cut as well as defer your tax.

-Many taxpayers won’t be able to itemize because of the high basic standard deduction amounts that apply for 2020 ($24,800 for joint filers, $12,400 for singles and for marrieds filing separately, $18,650 for heads of household), and because many itemized deductions have been reduced or abolished. Like last year, no more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (e.g., tax preparation fees and unreimbursed employee expenses) are not deductible; and personal casualty and theft losses are deductible only if they’re attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met.

You can still itemize medical expenses but only to the extent they exceed 7.5% of your adjusted gross income, state and local taxes up to $10,000, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt, but payments of those items won’t save taxes if they don’t cumulatively exceed the standard deduction for your filing status. Two COVID-related changes for 2020 may be relevant here: (1) Individuals may claim a $300 above-the-line deduction for cash charitable contributions on top of their standard deduction; and the percentage limit on charitable contributions has been raised from 60% of modified adjusted gross income (MAGI) to 100%.

Some taxpayers may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, a taxpayer who will be able to itemize deductions this year but not next will benefit by making two years’ worth of charitable contributions this year, instead of spreading out donations over 2020 and 2021. The COVID-related increase for 2020 in the income-based charitable deduction limit for cash contributions from 60% to 100% of MAGI assists in this bunching strategy, especially for higher income individuals with the means and disposition to make large charitable contributions.

-Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2020 deductions even if you don’t pay your credit card bill until after the end of the year.

-If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2020, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2020. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not good to the extent it causes your 2020 state and local tax payments to exceed $10,000.

-Required minimum distributions (RMDs) that usually must be taken from an IRA or 401(k) plan (or other employer-sponsored retirement plan) have been waived for 2020. This includes RMDs that would have been required by April 1 if you hit age 70½ during 2019 (and for non-5% company owners over age 70½ who retired during 2019 after having deferred taking RMDs until April 1 following their year of retirement). So if you don’t have a financial need to take a distribution in 2020, you don’t have to. Note that because of a recent law change, plan participants who turn 70½ in 2020 or later needn’t take required distributions for any year before the year in which they reach age 72.

-If you are age 70½ or older by the end of 2020, have traditional IRAs, and especially if you are unable to itemize your deductions, consider making 2020 charitable donations via qualified charitable distributions from your IRAs. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040.

However, you are still entitled to claim the entire standard deduction. (Previously, those who reached reach age 70½ during a year weren’t permitted to make contributions to a traditional IRA for that year or any later year. While that restriction no longer applies, the qualified charitable distribution amount must be reduced by contributions to an IRA that were deducted for any year in which the contributor was age 70½ or older, unless a previous qualified charitable distribution exclusion was reduced by that post-age 70½ contribution.)

-If you are younger than age 70½ at the end of 2020, you anticipate that you will not itemize your deductions in later years when you are 70½ or older, and you don’t now have any traditional IRAs, establish and contribute as much as you can to one or more traditional IRAs in 2020. If these circumstances apply to you, except that you already have one or more traditional IRAs, make maximum contributions to one or more traditional IRAs in 2020. Then, in the year you reach age 70½, make your charitable donations by way of qualified charitable distributions from your IRA. Doing this will allow you, in effect, to convert nondeductible charitable contributions that you make in the year you turn 70½ and later years, into deductible-in-2020 IRA contributions and reductions of gross income from later year distributions from the IRAs.

-Take an eligible rollover distribution from a qualified retirement plan before the end of 2020 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2020. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2020, but the withheld tax will be applied pro rata over the full 2020 tax year to reduce previous underpayments of estimated tax.

-Consider increasing the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year and anticipate similar medical costs next year.

-If you become eligible in December of 2020 to make health savings account (HSA) contributions, you can make a full year’s worth of deductible HSA contributions for 2020.

-Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2020 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

-If you were in federally declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, keep in mind you can choose to claim them either on the return for the year the loss occurred (in this instance, the 2020 return normally filed next year), or on the return for the prior year (2019), generating a quicker refund.

-If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in 2020 in order to maximize your casualty loss deduction this year.

Tax planning is unique to each situation and may involve us discussing your situation with the other professionals on your team. Contact us today to get started discussing the strategies that make sense for you!

 

The IRS, PPP and Tax Planning

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The IRS is creating tax planning challenges with regards to the PPP forgiveness. They have indicated the expenses associated with the funds, even when utilized appropriately, are not deductible as an expense.  This is a way of stating the forgiven PPP funds are taxable.  If this continues to be the case, it will be important to know what to do to minimize your tax liability.

Under the CARES Act, Congress said that the PPP (Paycheck Protection Plan) loan would be tax free. Initially, it is a loan but then you can apply for forgiveness and it therefore becomes a grant. Congress specifically said the grant was tax free.  This makes sense given that businesses were struggling to survive, not lay off employees during the shutdowns and determine how this will impact long-term.

However, the IRS rules indicated that the money could be tax free, but you were not allowed to take the deduction thereby decreasing your expenses and increasing your taxable income. 

The IRS indicated that if you expect to receive forgiveness, you must reduce your expenses. For example, let us say your Company received $100,000 in PPP funds.  After your period was up you applied for forgiveness for the entire amount since you utilized it according to the regulations.  The accounting of the loan is to zero out the loan and reduce the deductions by $100,000. In essence, the loan has now become taxable by reducing the allotted expenses. That is how debt forgiveness typically works – if you are released of a debt it becomes taxable income. This was not how Congress intended this particular program to work.

Congress has indicated they would correct this issue, but then they got busy with other things and a lot of partisan politics. The end results are that nothing has happened thus far. 

Now we have a new ruling from the IRS (Revenue Ruling 2020-27), and it is not good news.  

The IRS has now indicated that companies cannot deduct the expenses paid or incurred in 2020 if companies reasonably expect at year-end to receive forgiveness of the debt in 2021. In other words, even if the PPP is still a loan in 2020, you must account for it as it has been forgiven and pay tax on those funds.  Many questions have arisen if companies should wait to apply for forgiveness. With this new ruling, waiting does not appear to provide a benefit for 2020.

We are hopeful the current rulings will change to continue to help businesses who have struggled during the pandemic.  We are assuming this will not change by year-end and are planning accordingly.

What can you do now to pay less tax and plan accordingly? Contact us now to get your year-end tax strategy in place! 

Do You Qualify for the R&D Tax Credit?

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research and development taxYou don’t have to wear a white lab coat to claim the federal research and development tax credit if you meet the four criteria outlined in Internal Revenue Code Section 41 and its regulations. Learn why failing to explore this credit may be leaving money on the table.

Many manufacturing companies fail to take advantage of the generous research and development (R&D) tax credit simply because they don’t have staff working in a lab. The Internal Revenue Service’s (IRS) definition of R&D is codified at Internal Revenue Code Section 41 and its related regulations — and it may not be exactly what you think it is.

From 2018 to 2027, the estimated value of R&D tax credits to be claimed by U.S. companies is estimated at $163 billion, with $148 billion of that going to corporations.

You can take advantage of this tax credit as long as your company performs activities such as the following:

  • Redesigns its production process to be more efficient.
  • Introduces artificial intelligence or robotics into your manufacturing process.
  • Develops software that enhances your company’s processes or procedures.
  • Designs, constructs or tests product prototypes.
  • Develops second-generation or improved products.

This list is not all-inclusive. According to the IRS, many activities may qualify if they are performed in the United States and meet the following four-part test.

Part 1. Permitted purpose

The IRS test is to create a new or improved product, business component or process that increases performance, function, reliability, composition or quality or that reduces costs for your company. It does not have to be new to your industry.

Development of internal use software may meet the permitted purpose test if it:

  • is an innovation that provides economically significant results;
  • requires a certain amount of economic risk and use of resources to develop when recovery of the cost is uncertain over a reasonable time; and
  • is not commercially available for the intended purpose, although commercially available software may be eligible if it is significantly modified.

Part 2. Technological in nature

The research must fundamentally rely on the hard or physical sciences, such as engineering, physics, chemistry, biology or computer science.

Part 3. Uncertainty eliminated

You must be able to demonstrate that you’ve attempted to eliminate any uncertainty about the usefulness of the development, improvement or design.

Part 4. Process of experimentation

You must be able to demonstrate during the research process that you’ve experimented and evaluated alternatives. This may have been done through research techniques like modeling, simulation, trial and error or some other method.

Documenting R&D Activities

Claiming the credit requires a lot of supporting documentation, however. It is worth taking the time to assess whether the amount of tax relief you’ll get is worth the effort. For example, you’ll need to determine how much of a credit your company is eligible for, how difficult it will be to document your company’s R&D activities, whether the credit can be used to offset alternative minimum tax liability and whether you can claim previously unused credits.

Many, if not all, manufacturers may find they can reduce their taxes by taking advantage of the federal R&D tax credit. In addition, many states have an R&D credit that is available to manufacturers. It’s worth investigating and we can help. Contact us today to determine whether you should be claiming this credit.

Time Sensitive – $10,000 Ohio Small Business Relief Grant

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Governor Mike Dewine has designated $125,000,000 of funding received by the State of Ohio from the Federal CARES Act to provide $10,000 grants to small businesses to assist in ensuring the survival and stability of these crucial businesses.  These “Small Business Relief Grants” (SBRG) will be administered by the Ohio Development Services Agency.

$500,000 will be allocated to eligible businesses in EACH of Ohio’s 88 counties on a FIRST COME, FIRST SERVED BASIS.  The remainder of the funding available will be awarded on a FIRST COME, FIRST SERVED basis regardless of the business’ location in Ohio.

Eligible businesses include for-profit entities such as Corporations, LLC’s, Partnerships, Joint Ventures and Sole Proprietors.  The entity MUST HAVE AT LEAST 1 AND NO MORE THAN 25 Ohio employees paid via W-2 wages.  Please see the link below for more information.

https://www.businesshelp.ohio.gov/small-business-relief-grant.html

Beginning on November 2, 2020 at 10:00 AM, businesses can submit an application for the SBRG at www.businesshelp.ohio.gov.  In order to access the application, individuals will be required to login using an existing OH/ID (Ohio Business Gateway), which provides users with secure access to State of Ohio services and programs.

Due to the time-sensitive nature of the grant awarding, BGMF recommends that all qualified businesses apply on November 2nd at 10:00 AM.  If anyone requires assistance from BGMF, the applications will be submitted also on a first come, first served basis.  BGMF’s fee for the completion and submission of the application will be based upon the time spent on the individual application, not to exceed $750.

Contact us immediately if you have questions or need assistance.

Understanding Pre-Tax and After-Tax 401k Plans

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retirement savings plansA recent study showed that when 401(k) plans are offered, about 90 percent of all employees who have the option to contribute do so. There is, however, an important difference between pre-tax and after-tax contributions.

Most people think about saving for retirement. If your employer offers a 401(k) plan, which about half of all companies currently do, taking advantage of that plan is an attractive option.

In fact, a 2018 report by the Stanford Center on Longevity study found that most employees of all ages participated: 91 percent of those 25–34 to years old, 91 percent of those 35–44 to years old, 92 percent of those 45–54 to years old and 89 percent of those 55–64 to years old.

Pre-Tax 401(k) Plans

Pre-tax 401(k) plans are popular for the following reasons:

  • Contributions are tax-deferred, which means your money isn’t taxed until it is withdrawn, when it is likely you will be in a lower tax bracket.
  • Companies often match part or all of your contribution.
  • You don’t have to think about it once you choose to participate because deductions are automatic.
  • Because the amount you contribute is a pre-tax deductions from your take-home pay, your taxable income is reduced so you may pay lower income tax.

The amount you can contribute to a traditional 401(k) is limited. For 2019, the maximum limit is $19,000 (pre-tax and Roth). Amounts matched by your employer are not included in this limit. Participants age 50 and older are allowed to contribute an additional $6,000 “catch-up” contribution, bringing the total allowable contribution to $25,000.

After-Tax 401(k) Plans

That already sounds attractive, but some taxpayers are eligible to supersize their contributions and save even more – if their employers allow after-tax contributions to their 401(k). These plans allow you to contribute up to $37,000 more than the $19,000 limit. This means you can potentially save $56,000 annually in an after-tax 401(k) (that’s up to $62,000 if you are 50 or older).

Note the following tax considerations:

  • Your maximum contribution is reduced by any matching contributions.
  • Plan limits apply.
  • The plan is subject to nondiscrimination testing for highly compensated employees.
  • Your contributions are taxed in the year they are made, so your taxable income is not reduced by the amount of your contribution.
  • Because you’ve already been taxed on your contributions, any interest or dividends you earn grow tax-free rather than tax-deferred.

In-Plan Roth Rollover

Some employers allow participants to their traditional 401(k) plan to convert their plan to a Roth 401(k) while they are still employed at the company. Although this option is not widely available, it can be beneficial.

And Then What?

Certain tax events are triggered once you leave a company or retire:

  • If you have a traditional 401(k), your pre-tax contributions generally are rolled over into a traditional IRA. Any withdrawals are taxed as ordinary income.
  • If you have an after-tax 401(k), your contributions can be rolled over into a Roth IRA.You do not have to pay any taxes when you make withdrawals, because your contributions already have been taxed.

There is a lot to consider as you decide how to fund your retirement. This article doesn’t even touch other retirement vehicles such as other IRA’s, backdoor Roth contributions, defined benefit plans, or others. To ensure that you get the results you want, it is important to align your full financial situation with your financial goals and to speak with a professional.

Contact us today to set up a free consultation to assess your needs and guide you in the right direction.