Businesses:
The Tax Cuts and Jobs Act (TCJA) included numerous business-related provisions, most of which took effect last year. The TCJA's complexities are requiring businesses to adjust their tax strategies accordingly.
Some of the changes that took place in 2018 included reducing the corporate tax rate to 21%, eliminating corporate AMT, limiting business interest deductions, new expensing and depreciation rules, and a special deduction for non-corporate taxpayers with qualified business income from pass-through entities. Year-end strategies for 2019 to consider include:
Postpone income until 2020 and accelerate deductions into 2019. This time-tested technique can still apply. Delaying income (such as a bonus paid by your employer) may be desirable for those taxpayers who anticipate being in a lower tax bracket next year.
- Consider Section 179 expenditures.
For tax years beginning in 2019, the expensing limit is $1,020,000, and the phase-out starts at $2,550,000.
- 100% bonus first-year depreciation.
This deduction is for property and equipment bought new or used (with some exceptions) if such purchases are placed in service this year. 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 2019.
- 199A Optimization.
The 199A deduction is equal to 20% of net profits for passthrough entities and sole proprietorships. It is subject to limitations based on the taxpayer's income, type of business, amount of wages paid by the business, and cost of property placed in service. Proper planning before year-end can ensure that most, if not all, of these limitations can be avoided in order to optimize the 199A deduction.
- Set up and contribute to a retirement plan.
Options can include 401k, SEP-IRA, and defined benefit plans. Each option can provide substantial tax savings now while saving for your future. It is imperative that you choose the plan that aligns with your overall goals and cash flow needs.
- Income Acceleration.
Certain corporations (other than a large corporation) that anticipate a small net operating loss for 2019 and substantial net income in 2020 may find it worthwhile to accelerate 2020 income (or to defer just enough of its 2019 deductions) to create a small amount of net income for 2019. This allows the corporation to base its 2020 estimated tax installments on the relatively small amount of income shown on its 2019 return, rather than having to pay estimated taxes based on 100% of its much larger 2020 taxable income.
- Dispose of a passive activity in 2019, if doing so will allow you to deduct suspended passive activity losses (to reduce 2019 taxable income).
This is not an exhaustive list, but it is a good starting point for discussions with your tax accountant. Since tax planning strategies for businesses can be complex and application depends on numerous factors, it is essential to discuss your business tax planning with your CPA.
Tax Outlook:
Looking toward 2020, Senior Tax Manager, Richard Warner, CPA has updated his annual "Tax Outlook" – please take a look and let us know if you have any questions.