By Cameron Cole and Tina Myers
Year-end tax planning for 2020 takes place against the backdrop of legislative changes that occurred in late 2017 from The Tax Cuts and Jobs Act (TCJA) and a number of tax provisions for small bus-inesses under the Coronavirus Aid, Relief and Economic Security Act (CARES Act).
For businesses, the Tax Cuts and Jobs Act (TCJA) cut the corporate tax rate to 21 percent, the corporate alternative mini-mum tax (AMT) is now gone, there are new limits on business interest deductions and the law significantly liberalized expensing and depreciation rules. The TCJA also introduced a new deduction for non-corporate taxpayers with qualified business income from pass-throughs. This year, we’ve seen loan assistance programs to get cash into businesses and under the CARES Act, new tax credits to offset the costs to retain employees.
Here are a few ideas that business owners can implement before 2020 winds down:
Take advantage of the business expensing election (Section 179 election)
For qualified property placed in service in tax years beginning in 2020, the maximum amount that may be expensed under the Code Sec. 179 dollar limitation is $1,040,000 and the beginning-of-phaseout amount is $2,590,000. These limits will be adjusted for inflation in 2021. The expensing deduction can be claimed regardless of how long the property is held during the year. Therefore, property acquired and placed in service in the last days of the tax year, rather than at the beginning of the following year, can result in a full expensing deduction for the earlier year. Also, recall that the TCJA expanded the definition of section 179 property to include qualified improvements to nonresidential real property, which means certain improvement to a building’s interior and for improvements such as roofs, HVACs, fire protection systems, alarm systems and security systems.
Take advantage of “bonus” depreciation
Most new, as well as used, machinery and equipment bought and placed in service in 2020 qualifies for a 100 percent bonus first-year depreciation deduction. Additionally, as a result of the TCJA, the additional first-year depreciation deduction may be claimed for used as well as new property. Bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, a 100 percent write-off may be claimed even if qualifying assets are in service for only a few days in 2020. The limit on annual depreciation deductions for passenger autos (including trucks, vans, and electric automobiles) which bonus first-year depreciation deduction applies are extra-generous now. Heavy vehicles, such as SUVs, pickup trucks or vans — those that are built on a truck chassis and are rated at more than 6,000 pounds gross (loaded) vehicle weight — are exempt from the luxury-auto dollar caps because they fall outside of the definition of a passenger auto. Thus, thanks to 100 percent bonus depreciation under Code Sec. 168(k), the entire cost of a heavy vehicle bought in 2020 and used 100 percent for business may be deducted this year.
Maximize the pass-through business income deduction
(Section 199A deduction)
Through 2025 a new deduction is available equal to 20 percent of qualified business income from partnerships, S corporations and sole proprietorships. The heart of planning for this deduction is managing taxable income and for those in a non-specified service trade or business, managing the wage/capital limitation. To reduce taxable income below the threshold amount, a few ideas to consider are making pension plan contributions, increasing payroll, accelerating business expenses, recognizing losses, avoiding recognizing gains and making charitable contributions. If you are in a non-specified service trade or business, but you exceed the income limitations and thus are subject to the additional W-2 wage and capital (qualified property) limitation, you should consider making additional qualified capital purchases or increasing wages to increase your available QBI deduction. Future tax changes could have this deduction phase out for higher earners. Those that are pass-through entities that would be impacted by a phase-out may consider starting conversations regarding whether C corporation status would be more beneficial if they weren’t eligible for the business income deduction.
Accelerate and pay 2020 employee bonuses
Generally, accrual basis employers want to incur the liability for bonuses and have it deductible for the current year and then pay the bonuses to employees the following year, so that employees report the income the following year if they are cash method taxpayers. However, with the possibility of future tax rate increases, employees may be wanting their bonuses paid in 2020, instead of in 2021. Bonuses paid to sole proprietors, LLC members and partners aren’t deductible, because the owners of these types of businesses are considered self-employed.
Split business income with family members
A business owner can split business income by gifting family members an interest in the business. An S-corporation business owner can gift non-voting shares without giving up control. A C corporation business owner can gift common stock, preferred stock or debt securities if the capital structure of the corporation permits. If the business is a partnership or an LLC taxed as a partnership, a partner can gift a portion of a partnership interest.
Children can work for the family business. Placing the child on the business payroll enables the child to make deductible IRA contributions. Putting children to work may also help avoid the kiddie tax, which has now been restored back to the parent’s individual marginal income tax rate. (The TCJA had previously changed the kiddie tax rules to use the trust and estate tax income tax rates.) The kiddie tax only applies to children whose earned income does not exceed one-half the amount of their support. Putting children on the family payroll may increase their earned income to an amount more than one-half their total support, thus, exempting their unearned income from the kiddie tax.
The CARES Act provided several significant tax-savings opportunities. Don’t forget to take advantage of previous tax provisions of the TCJA and the SECURE Act that could provide additional cash needed for businesses. These are just a few options businesses have to consider in year-end planning.
Cameron Cole is the Key Private Bank Sales Leader in Utah. Tina Myers is a Financial Team Lead at Key Private Bank.
Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice.