2019 Year-End Planning for Businesses

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2019 Year-End Planning for Businesses

As year-end approaches, it is a good time to think of planning moves that may help lower your business’s 2019 tax bill.

Last year, the federal tax reform bill commonly known as the Tax Cuts and Jobs Act of 2017 (“Tax Act”) became effective, resulting in major changes in tax rules for businesses.  Some of the major changes included the introduction of the Qualified Business Income passthrough deduction, a flat corporate income tax rate, and greatly expanded thresholds for first year expensing of capital expenditures.  Although federal and state taxing agencies are still releasing guidance and updating tax forms, there are a number of things you can do to prepare for the second filing season under these new rules.

Below we have compiled a list of items that may be helpful if taken into account before the end of 2019.  Please review the following list and contact us to discuss the benefit and/or your eligibility before you consider taking any action to save or defer taxes.

  • 20% Qualified Business Income deduction. As a result of the Tax Act, Partnerships, S corporations, and sole proprietorships may qualify for a deduction of 20% of their passthrough income.  The “Qualified Business Income (QBI)” deduction is subject to many limitations including the type of business, wages paid by the business, bases of your property assets, and total taxable income. However, most taxpayers with taxable income below $160,700 (single) and $321,400 (married filing joint) will not be subject to these limitations and will qualify for the benefit.  Careful planning and analysis is needed to maximize this deduction for your partners, shareholders, or other members.
    • Charitable contributions made personally are generally not included in the computation of your Qualified Business Income, so consider making your gifts to charity on the individual level, rather than through your business, as a way to maximize your QBI deduction.
  • Accelerate depreciation deductions on capital investments: Businesses can consider investing in capital expenditures that qualify for 100% bonus first year depreciation if acquired and placed in service in 2019.  As a result of the Tax Act, used property may now also qualify for 100% bonus first year depreciation. Additionally, IRC Section 179 expensing thresholds have been increased to $1,020,000 annually, phasing out at $2,550,000 in total assets placed in service in 2019. Although certain limitations still apply to vehicles (passenger autos) and industry specific capital projects (qualified retail improvement property), these provisions greatly expand most businesses’ ability to recover tax benefits from its capital investments immediately.
    • Passenger automobiles acquired and placed in service during 2019 are generally subject to first-year automobile bonus depreciation limits of $8,000.  Alternatively, a SUV, truck, or van may qualify for  an accelerated first-year bonus depreciation allowance or bypass these bonus depreciation limitations altogether.
  • Retirement contributions: Consider your ability to fund and to what level you can accrue future contributions to retirement accounts that qualify for a business deduction in 2019. If you haven’t done so already, consider establishing a retirement plan if you are self-employed.  There are many retirement planning tools and applicable funding opportunities that may apply. Consideration needs to be given to which may best suit your needs, the needs of the organization, and its employee(s).
  • Change in accounting method. The Tax Act provided additional opportunities for businesses to seek income tax benefits from switching the method of accounting, allowing you to defer income or accelerate deductions. If you were previously required to be on the accrual basis because of income thresholds, the new and higher thresholds may allow you to defer income by switching to the cash basis of accounting.
  • Net Operating Loss limitation rules. Net Operating Losses are required to be carried forward into subsequent tax years, are limited to 80% of taxable income, and do not expire.
    • Net Operating Losses and estimated tax payments: If you anticipate a small net operating loss for your corporation in 2019 and substantial net income in 2020, consider accelerating income to 2019 or deferring deductions to 2020 in order to create a small amount of taxable income in 2019.  This may allow your corporation to base its 2020 estimated tax payments on the small amount of 2019 taxable income, rather than paying estimated taxes based on 100% of its much larger 2020 taxable income.
  • Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. In general, your ability to deduct losses from a partnership or S corporation is limited to your basis in your investment, including certain loans you have made or have guaranteed. If you anticipate losses in the current year, you may consider  contributing cash or other assets, or making a loan to your company, to increase your basis sufficiently to deduct a business loss.
  • Excess business loss limitation rules. Trade or business losses in excess of $250,000 for single taxpayers ($500,000 married filing a joint tax return) over the total amount of trade or business income will not be deductible in the current year.  Instead, the excess is added to a Net Operating Loss and carried forward to the subsequent tax year.

Other items to consider in year end planning

  • Consider accelerating any expenses before year end to minimize overall taxable income.
  • Consider any opportunities to defer income into January 2020.
  • Corporations need to determine the amount of reasonable compensation they pay to officers annually, and consider the relationship to the amount of distributions/dividends incurred.
  • Determine any deductible accrued bonuses that may be payable in early 2020.
  • Determine the company’s or individual partner’s/shareholder’s need to make estimated tax payments to avoid underpayment penalties.
  • Self-employed individuals who obtain insurance from an exchange may be required to repay part or all of their advanced premium tax credit if their income exceeds certain thresholds.
  • Employers currently  paying for family and medical leave for its employees may consider maximizing their ability to claim a paid family and medical leave tax credit.
  • Employers who have hired or plan on hiring “disadvantaged workers” may be able to maximize their ability to claim a Work Opportunity Tax Credit (WOTC).

We strive to provide you with applicable and valued tax planning opportunities while we anticipate additional guidance from the Internal Revenue Service, U.S. Treasury, state taxing agencies, and possibly from Congress in the form of technical corrections, which may be material.  Therefore, subsequent developments changing the facts provided to us by the applicable taxing authorities may affect advice we provide.

We are happy to discuss any of the above items with you further and tailor a tax strategy that will work best for you; please contact us with any questions you may have.