As we maneuver through the holiday season, we encourage business owners to not lose sight of the importance of tax planning. While tax planning may seem like an unnecessary burden during an already hectic time, we often find it to be a financially beneficial use of ones’ time.
Below you will find some tax savings strategies that you may be able to apply to your unique tax situation:
Timing of Income and Deductions
Many businesses are set up as “pass-through” entities, such as partnerships, S corporations and limited liability companies that are treated as partnerships for tax purposes. As an owner, you receive a pro rata share or special allocation of a pass-through entity’s net income that is taxed at your personal income tax rate.
A strategy of deferring income from these entities into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or a lower tax bracket next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2019 until 2020.
However, if you anticipate being in a higher tax bracket in 2020, you might consider a reverse approach. Accelerate income into this year and postpone deductible expenditures until 2020. The mechanics and applicability of these strategies will be dependent on your overall tax method of accounting.
Maximize the Qualified Business Income Deduction
Owners of pass-through entities (including sole proprietorships) may be eligible for a deduction based on qualified business income (QBI) for tax years beginning in 2018 through 2025. The deduction can be up to 20% of a pass-through entity owner’s QBI, subject to certain restrictions and limitations, including the type of business activity.
The QBI deduction is available only to non-corporate taxpayers, which includes individuals, trusts and estates. It also can be claimed for up to 20% of income from qualified real estate investment trust (REIT) dividends and 20% of qualified income from publicly traded partnerships (PTPs).
Tax planning can help you maximize this deduction by identifying potential issues with the limitations and taking steps before the year-end to control the results.
The qualified business income deduction presents an opportunity that may reduce a pass-through owner’s maximum individual effective tax rate from 37 percent to 29.6 percent.
Claim 100% Bonus Depreciation for Asset Additions
Under current law, 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in calendar year 2019. That means your business might be able to write off the entire cost of some (or all) of your 2019 asset additions on this year’s return. Bonus depreciation is not subject to any spending limits or income-based phase-out thresholds.
There is still time to consider buying some extra equipment, furniture, computers or other fixed assets before year-end.
One transaction that could deliver tax savings on your 2019 tax return is the purchase of a “heavy” vehicle. Heavy SUVs, pickups and vans that are used over 50% for business are treated for tax purposes as transportation equipment. So, they qualify for 100% bonus depreciation. Specifically, bonus depreciation is available when the SUV, pickup or van has a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds.
Utilize More Generous Section 179 Deduction Rules
For 2019, the inflation-adjusted amount for Section 179 expensing is $1,020,000. There are phase-out limitations when $2,550,000 of qualified Section 179 assets are acquired during the tax year.
The Tax Cuts and Jobs Act (TCJA) provides other beneficial changes to the Sec. 179 expensing rules that may be of interest:
- Qualifying real property: 179 expensing can be claimed for qualifying real property expenditures, up to the maximum annual allowance. There’s no separate limit for qualifying real property expenditures, so Sec. 179 deductions claimed for real property reduce the maximum annual allowance dollar for dollar.
Qualifying real property refers to any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is first placed in service. However, costs attributable to the enlargement of a building, any elevator or escalator, or the building’s internal structural framework don’t qualify.
For tax years beginning in 2018 and beyond, the TCJA expanded the definition of real property eligible for Sec. 179 expensing to include qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property. These items must be placed in service in tax years beginning after 2017, and after the nonresidential building has been placed in service.
- Opportunity Zones
New Opportunity Zone tax incentives allow investors to defer tax on capital gains by investing in Qualified Opportunity Funds. Taxpayers can defer taxes by reinvesting capital gains from an asset sale into a qualified opportunity fund during the 180-day period beginning on the date of the sale or exchange giving rise to the capital gain. Once rolled over, the capital gain will be tax-free until the fund is divested or the end of 2026, whichever occurs first. The investment in the fund will have a no tax basis. If the investment is held for five years, there is a 10-percent step-up in basis and a 15-percent step-up if held for seven years. If the investment is held in the opportunity fund for at least 10 years, those capital gains in excess of the rollover amount (i.e., not the original gain but the post-acquisition appreciation) would be permanently exempt from taxes. To maximize the potential benefits, taxpayers must invest in a Qualified Opportunity Fund before December 31, 2019.
- Interest Deduction Limitation
Taxpayers now face possible limitations on their ability to deduct business interest paid or accrued on debt allocable to a trade or business pursuant to Section 163(j). Section 163(j) may limit the deductibility of business interest expense to the sum of (1) business interest income; (2) 30 percent of the adjusted taxable income (ATI) of the taxpayer; and (3) the floor plan financing interest of the taxpayer for the taxable year (applicable to dealers of vehicles, boats, farm machinery or construction machinery).
Exceptions do exist for small business taxpayers whose average annual gross receipts over the past three years do not exceed $26 million, certain electing real property trades or businesses, electing farming businesses, and certain utilities.
Tax Planning Sessions Often Uncover Opportunity
This is not an exhaustive list. Other more sophisticated strategies like cost segregation studies, like kind exchanges or research and development credits could be available to the right taxpayer.
In closing, it may only take a few minutes to identify strategies that can save income taxes so be sure to reach out to your advisor and discuss these items as they apply to you.
BerganKDV has a team of tax professionals to help you navigate year-end tax planning. Start here.