Business owners should review year-end tax planning steps they can take as individuals, in addition to the following moves that can be helpful for their companies.
Taxpayers other than corporations may be entitled to a deduction of up to 20% of certain domestic qualified business income (“QBI”). If taxable 2019 income exceeds $321,400 for a married couple filing jointly, $160,700 for singles and heads of household, or $160,725 for marrieds filing separately, the QBI deduction may be limited depending on: whether the taxpayer is engaged in a specified service trade or business (including 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 wages/capital limitations on QBI deduction are phased in. For example, the phase-in applies to joint filers with taxable income between $321,400 and $421,400, and to single taxpayers with taxable income between $160,700 and $210,700. Taxpayers may be able to achieve significant savings with respect to this deduction by deferring income or accelerating deductions so they come under the dollar thresholds (or are subject to a smaller phase-out of the deduction) for 2019.
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 complex, so consult your tax adviser.
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 2019, this test is satisfied if, during a three-year testing period, average annual gross receipts don’t exceed $26 million.
Cash method taxpayers may find it easier to shift income – for example, holding off billings until next year, or accelerating expenses by paying bills early or making certain prepayments.
Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2019, the expensing limit is $1,020,000, and the investment ceiling limit is $2,550,000.
Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for certain kinds of property improvements. The generous dollar ceilings that apply this year mean that many small and medium sized businesses can deduct most if not all their outlays for machinery and equipment.
What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. If you are eligible to take it, this deduction can be a potent tool for year-end tax planning; property acquired and placed in service in the last days of 2019, rather than at the beginning of 2020, can result in a full expensing deduction for 2019.
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. 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.
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 federal tax 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 (e.g., a certified audited financial statement along with an independent CPA’s report), or $2,500 without the statement.
A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for 2019 and substantial net income in 2020 may find it worthwhile to accelerate just enough of its 2020 income (or to defer just enough of its 2019 deductions) to create a small amount of net income for 2019. This will permit 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.
To reduce 2019 taxable income, consider deferring a debt-cancellation event until 2020, or disposing of a passive activity in 2019 if doing so will allow you to deduct suspended passive activity losses.
These are just some of the year-end steps that can be taken to save taxes. Contact us for help tailoring a plan that will work best for you.