The end of year is approaching, and that means it’s time for businesses and business owners to start thinking about their 2019 taxes. The major changes set forth last year by the Tax Cuts and Jobs Act (TCJA) will undoubtedly have an impact on your year-end tax planning methods, but there are some effective tax-saving strategies you can implement before the end of the year.
What’s Changed for Businesses?
The TCJA brought many changes for businesses, including:
- The corporate tax rate has been reduced to 21%
- Elimination of corporate AMT
- There are limits on business interest deductions
- There are very generous expensing and depreciation rules
- Non-corporate taxpayers with qualified business income from pass-through entities may be entitled to a special deduction
With these changes in mind, there are several effective tax strategies you can consider before heading into the new year.
Deduct Up To 20% of Qualified Business Income
Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2019, if taxable income exceeds $321,400 for married couples filing jointly, $160,700 for single filers, and $160,725 for married couples filing separately, 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-out 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.
Deferring Income and Accelerating Deductions
Taxpayers may be able to achieve significant savings by deferring income or accelerating deductions to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2019. Depending on your business model, you may also be able to increase the new deduction by increasing W-2 wages before year-end. Keep in mind that these rules are very complex, so it’s a good idea to talk to your accountant before taking any actions.
Additionally, corporations (other than a large corporations) anticipating a small net operating loss 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.
Cash vs. Accrual Method
This year, more small businesses will be able to use the cash method of accounting rather than accrual. Among other things, a taxpayer must satisfy a gross receipts test to qualify as a small business. For 2019, 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 $5 million). Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings until next year or by accelerating expenses, like paying bills early or by making certain prepayments.
Expenditures that Qualify for Liberalized Business Property
Businesses should consider making expenditures that qualify for the liberalized business property Section 179 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 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 ceilings that apply this year 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 machinery and equipment. Additionally, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full regardless of how long the property is held 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 2019, rather than at the beginning of 2020, can result in a full expensing deduction for 2019.
Bonus Depreciation for Machinery and Equipment
Businesses can also 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.
De Minimis Safe Harbor Election
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 Section 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 (such as a certified audited financial statement along with an independent CPA’s report). If there’s no applicable financial statement, 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 2019.
Last but not least, taxpayers may also consider deferring a debt-cancellation event until 2020 to reduce 2019 taxable income. You may also consider disposing of a passive activity in 2019 if doing so will allow you to deduct suspended passive activity losses.
All of the above tax strategies have significant tax-saving power; however, they are not a one-size-fits-all solution for every business. It’s important to remember that every business is unique, and tax strategies will vary based on your particular circumstances. If you think you or your business may benefit from one of these strategies, please reach out to our tax expert to learn more.