December 12, 2019
The following is excerpted from the Dowell Group newsletter for 2019, which covered a range of topics for individuals and businesses.
The following letter was prepared and distributed to clients and friends of Dowell Group, LLP. The letter discusses individual and business tax planning ideas that may be appropriate in certain situations. This does not represent tax advice, as every situation must be considered on its own merits.
2019 YEAR-END CHECKLISTS
Businesses – Year-End Tax Planning
- Tax planning at year-end – virtually every business will benefit by doing some year-end tax planning. Bring in your CPA in the analysis; any money spent will help to avoid large surprises, cash flow crises, or penalties.
- 20% qualified business income deduction – Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. If taxable income exceeds $321,400 for a married couple filing jointly, or $160,725 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), 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 $321,400 and $4421,400 and for all other taxpayers with taxable income between $160,700 and $210,700.
- 20% qualified business income deduction income planning – Considering the above, taxpayers may be able to achieve significant savings by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phaseout 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 quite complex, so don’t make a move in this area without consulting your tax adviser.
- Cash basis of accounting – More “small businesses” are able to use the cash (as opposed to accrual) method of accounting in 2019 and later years 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. The gross-receipts 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 a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.
- Expensing equipment purchases under Code Section 179 – In 2018, the expensing limit is $1,020,000, and the investment ceiling limit is $2,550,000. Most depreciable property (not buildings) and off-the-shelf computer software qualify. Expensing also 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. 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. The expensing deduction is not prorated for the time that the asset is in service during the year. 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.
- Filing due dates – Remember from last year that C corporation and partnership filing deadlines have been swapped. Partnership returns will be due March 15th, while C corporation returns are due on April 15th.
- Bonus depreciation – 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.
- Expensing low-cost assets – 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 Sec. 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 (an AFS is a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, 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.
- Reasonable compensation – Shareholder-employees must take reasonable compensation for their services, and this continues to be a focus of the IRS. On the positive side, taking reasonable compensation can also open the door to larger retirement plan contributions for the employee-owners. However, the level of compensation can effect the 20% qualified business income deduction, referenced above.
- Retirement plans – It is too late to set up a 401k or a Simple plan for 2019, but some options may still available to save on a business owner’s 2019 taxes. If you are self-employed and haven’t done so yet, consider setting a self-employed retirement plan. This is also a good time to consider which retirement plan is the right one for your business for 2020 and future years.
- Cancellation of debt – Analyze the specific facts and consider the effect on income and income taxes if debt is cancelled in 2019 or 2020.
- Research and development credit – The calculation for the R&D credit is complicated and will typically require a great deal of analysis. However, it provides a credit for every qualifying dollar spent on research and development activity. Historically, the credit has had limited immediate impact to start-up businesses because it was only helpful if the entity had taxable income. The credit can now be used (in a diminished capacity) as a refund to offset payroll taxes. In another change, privately-held businesses can now claim the R&D credit against the AMT. This is important because many new businesses have net operating losses in the early years, which pushes the business into AMT, limiting their ability to benefit from the R&D credit.
Businesses – Other Considerations
- Corporate records – update annual resolutions and officer elections.
- Good standing – verify that the annual franchise tax return has been filed with the State of incorporation or organization.
- Insurance – consult with your advisors, executive team, and insurance agent to determine if your business, and key officers, are adequately insured.
- Buy-sell agreement – if your business has multiple shareholders, consider adopting an agreement to orderly transfer those shares in the event of a sale, retirement, or death.
- Budget – every business should have a budget or a forecast in place. Assemble your trusted team, pull the data together, study the most recent results, consider objectives for the coming year, and create the budget or forecast.
- Benefits – many businesses would benefit by checking their benefit package annually, to be sure that it is competitive with the marketplace. This includes retirement accounts offered, insurance options, as well as “soft” benefits like remote work and flex-time.
- Compensation – consider if the level of pay of your current employees is competitive. In today’s competitive environment, it is often much easier to retain a key employee than recruit one.
- Security – cyber security should rank at the top of everyone’s list. Discuss weaknesses in your server, systems, or procedures with internal staff and with experts in the field. Also consider physical security; is your building secured with proper alarms, cameras, etc.?
- Entity type – even though making a change is not likely, sit down with your attorney and CPA to discuss entity type; maybe your business would benefit by considering a different structure. Limited liability companies have grown in popularity, but there is also a place for S corporations, and C corporations may still offer some advantages.
- Ownership structure – there may be a number of reasons to consider the ownership of a business, including the need to reward and retain key employees, to gain income tax or estate tax advantages.
- Acquisitions – expanding in the marketplace may offer strategic advantages to a business, whether to open up new markets, access new customers, or gain skill sets. Identifying key targets may be something to consider in the new year, if it fits with the goals of ownership.