Wrap up the crazy year that is 2020 on the right foot with your business by reviewing your tax planning and implementing strategies to optimize opportunities. Provisions of the Tax Cuts and Jobs Act (TCJA) are still in play. For those involved in closely held entities, carefully pairing your business strategy with your personal strategy is essential this season.
This guide offers several opportunities for tax savings before year-end. Contact your Goering & Granatino team member for assistance and clarification on how these strategies may impact your unique situation. Call (913) 396-6225.
Review your accounting records, or have us check them, to make sure you have accurate information. Ensure your account reconciliations are complete and correct and review old outstanding items. Once you have a reasonably accurate net income amount, you can project to the end of the year to determine what steps you might need to take.
Evaluate your net income position for 2020 with what you expect for 2021. You may want to accelerate or defer income or expense items to improve your income position.
Section 199A Deduction for Qualified Business Income
Enacted as part of TCJA, the Section 199A tax break allows for up to a 20% deduction for qualified business income (QBI) from sole proprietorships, S corporations, partnerships, and LLCs taxed as partnerships.
- The deduction, available to both itemizers and nonitemizers, is claimed by individuals on their personal tax returns as a reduction to taxable income but is subject to some complicated restrictions and limitations.
- For 2020, if taxable income exceeds $326,600 for a married couple filing jointly or $163,300 for all other taxpayers, 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), and
- 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 joint filers with taxable income between $326,600 and $426,600 and for all other taxpayers with taxable income between $163,300 and $213,300.
Taxpayers may be able to achieve significant savings with respect to this deduction by deferring income or accelerating deductions to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2020.
- Depending on their business model, taxpayers may also be able increase the new deduction by increasing W-2 wages before year-end.
- The rules are quite complex, so don’t make a move in this area without consulting your tax adviser.
Accounting Method Reform
More small businesses can use the cash method of accounting in 2020 than could do so in earlier years, as opposed to the accrual method frequently used in prior years.
- To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test.
- For 2020, 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 till next year or by accelerating expenses, by paying bills early or by making certain prepayments.
Fixed Asset Depreciation Deductions
Businesses should consider making expenditures that qualify for the liberalized business property expensing option.
- For tax years beginning in 2020, the Section 179 expensing limit is $1,040,000, and the investment ceiling limit is $2,590,000.
- In addition, purchases of new and used assets can qualify for 100% bonus depreciation if you have maxed out your 179 expensing.
Expensing is generally available for most depreciable property, other than buildings, and off-the-shelf computer software.
Additionally, expensing is 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.
- This applies to nonresidential property only.
The generous dollar ceilings that apply this year mean many small and medium sized businesses making timely purchases will be able to deduct most if not all their outlays for business equipment.
- The expensing deduction is not prorated for the time the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning.
- Property acquired and placed in service in the last days of 2020, rather than at the beginning of 2021, can result in a full expensing deduction for 2020.
There are some safe harbor elections available that allow you to expense lower-cost assets and certain materials and supplies. The safe harbor level depends on whether you have audited financial statements. The elections should be in writing and in effect as of the beginning of the year.
Tax Obligations Related to the PPP & EIDL
The current IRS stance is that expenses related to PPP loans are not deductible in 2020 if the loan is, or is expected to be, forgiven. Unless Congress acts to change this, the expenses must be added back to taxable income.
EIDL grant funds are believed at this point to be considered taxable income but expenses related to this grant would be deductible.
Tax Obligations and Opportunities under Wayfair
In 2018, the Supreme Court of the United States issued its widely anticipated decision in Wayfair, allowing states to impose a tax payment or tax collection obligation on out-of-state business, regardless of whether the business has a physical presence in the state.
- While Wayfair dealt with remote seller sales and use tax collection obligations, states may now tax a business even if the business has no in-state physical presence.
- Overnight, remote sellers, licensors of software, financial services, franchisors, and other businesses that provide services or deliver their products to customers from a remote location must start complying with state and local taxes.
- Left unchecked, these state and local tax obligations and correlated liabilities from tax, interest, and penalties will grow over time. A business is likely impacted by Wayfair if any of the following apply:
- The business makes sales into states in which it is not registered or filing sales/use tax returns.
- The business ships goods or provides services to customers located in states where it has little or no in-state physical presence.
- The business makes retail sales of tangible goods.
- The company provides online services or makes sales of digital goods.
- The business licenses software or provides access to software.
- The business received a “nexus questionnaire” or received audit or tax notices from any state where it is not currently registered for sales/use taxes.
Businesses for which any of the above apply should take steps to minimize potential exposures from tax, interest, and penalties that may arise from Wayfair, and plan around the very fluid state changes that are happening and will occur in the near future. Contact your Goering & Granatino team member to discuss strategies if you conduct business with customers in multiple states.