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!