2019 Year-End Tax Planning and Issues for Businesses
As year-end approaches, each business should consider the many opportunities that might be lost if year-end tax planning is not explored. A business may want to consider several general strategies, such as use of traditional timing techniques for delaying income recognition and accelerating deductions. A business should also consider customized strategies tailored to its particular situation.
For the 2019 tax year, many temporary credits and deductions were permanently extended several years ago. A handful of other credits expire in 2019 through 2021.
The end of the year provides an important opportunity to change the final course of your business’ tax year before it closes for good.
C corporations enjoy a flat 21% statutory tax rate and pass-through entities are taxed at lower rates following the 2017 tax act, income deferral remains an important consideration in business tax planning. If a taxpayer expects taxable income to be higher in 2019 than 2020, or if the taxpayer anticipates being taxed at a higher rate in 2019 than 2020, the taxpayer may benefit by deferring income into 2020. Some ways to defer income are discussed below.
Use of Cash Method of Accounting:
By adopting the cash method of accounting instead of the accrual method, a taxpayer generally can improve their position for accelerating deductions and deferring income. An automatic change to the cash method can be made by the due date of the return including extensions. A business entity generally must obtain IRS consent to change an overall method of accounting by filing Form 3115, Application for Change in Accounting Method.
If a taxpayer uses the cash method of accounting, the taxpayer may consider delaying year-end billing to clients so that payments are not received until 2020.
Should the Taxpayer Accelerate Income into The Current Year?
A business taxpayer may benefit from accelerating income into the current year. For example, the taxpayer may anticipate being taxed at a higher rate in 2020, or perhaps the taxpayer needs additional income this year to take advantage of an offsetting deduction or credit that will not be available in a future tax year. Accelerating income into 2019 could be disadvantageous if the taxpayer expects to be in the same or lower tax bracket for 2020.
A business that reports business income and expenses on a cash basis could issue bills and pursue collection before the end of 2019. Also, the taxpayer could check to see if clients or customers are willing to pay for January 2020 goods or services in advance. Any income received using these steps will shift income from 2020 into 2019.
Should an Owner of a Closely Held Family Business Consider Gifting Interests?
Owners of closely held businesses may want to consider gifting an interest in the business (corporate stock or interests in family limited partnerships or LLCs). A taxpayer may take advantage of valuation discounts (marketability and minority discounts) and the 2019 gift tax exclusion of $15,000 per donee ($30,000 when gift-splitting) when gifting family business interests before year end.
Are There Business Deductions that Can Be Accelerated into The Current Year?
If a business uses the accrual method, business accounts receivable should be analyzed and those receivables that are totally or partially worthless should be written off. By identifying specific bad debts, the taxpayer should be entitled to a deduction. The taxpayer may be able to complete this process after year’s end if the write-off is reflected in year-end financial statements. For non-business bad debts (such as uncollectible loans), the debts must be wholly worthless to be deductible, and will probably only be deductible as a capital loss.
Current- Year Bonuses:
In general, a taxpayer’s liability for employee bonuses accrues and is deductible for the current year even though the bonus is paid in the following year, if all the events are satisfied that fix the liability and the taxpayer does not have a unilateral right to cancel the bonus at any time prior to payment. Generally, the taxpayer may accelerate the bonus deduction into the current year while the employees will report the income in the following year if they are cash method taxpayers. Furthermore, any compensation arrangement that defers payment will be currently deductible only if paid within 2½ months after the employer’s year- end.
Suspended Passive Losses:
Generally, a taxpayer may have passive losses that have been suspended and not yet allowed as a deduction. Determine what might be done to identify and absorb or release the suspended losses as part of the taxpayer’s overall tax planning.
Prepayment of Taxes:
For taxpayers that pay payroll taxes on a quarterly basis, consider accelerating 4th quarter payroll taxes at December 31 year- end and do not wait until January 15, 2020. Consider accelerating state income estimated taxes and property taxes if possible if the taxpayer would benefit from a current year state income tax deduction. AMT should be considered for pass-through entities taxed at individual rates if accelerating state income and property taxes.
Tax Credits and Deductions
Taking inventory of what deductions and credits your business has been using and whether they remain available or will be removed in the near future can significantly impact your bottom line. Many of the provisions now periodically extended relate to energy-related activities, or specific industries, but it is important to make sure that any credits are considered in light of their availability. There are many tax credits available to taxpayers, consider the following credits, for example.
Research and Development (R&D) Tax Credit:
Some business projects, such as those involving development of new or more reliable products, processes, or techniques, may be eligible for R&D tax credit. Eligible small businesses ($50 million or less in gross receipts) may claim the R&D tax credit against alternative minimum tax liability (which no longer applies to C corporations due to the repeal of the corporate AMT by the 2017 tax act), and the credit can be used by certain qualified small businesses against the employer’s payroll tax (i.e., FICA) liability.
Employer Wage Credit for Employees in the Uniformed Services:
Some employers continue to pay all or a portion of the wages of employees who are called to active service. The amount of the credit is equal to 20% of the first $20,000 of differential wage payments to each employee for the taxable year. Employers of any size with a written plan for providing such differential wage payments are eligible for the credit.
Work Opportunity Credit:
The work opportunity credit is an incentive provided to employers who hire individuals in groups whose members historically have had difficulty obtaining employment. The credit gives a business an expanded opportunity to employ new workers and to be eligible for a tax credit based on the wages paid. The credit is available for first-year wages paid or incurred for employees hired and who began work during certain years the credit was available. Employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more) will be entitled to an increased credit amount (i.e., 40% of the first $6,000 of wages) for new hires that begin to work for an employer on or after January 1, 2016, through December 31, 2019.
Small Employer Pension Plan Startup Cost Credit:
Certain small business employers that did not have a pension plan for the preceding three years may claim a nonrefundable income tax credit for expenses of establishing and administering a new retirement plan for employees. The credit applies to 50% of qualified administrative and retirement-education expenses for each of the first three plan years. However, the maximum credit is $500 per year.
Employer-Provided Child Care Credit:
For 2019, employers may claim a credit of up to $150,000 for supporting employee child care or child care resource and referral services. The credit is allowed for a percentage of “qualified child care expenditures,” including for property to be used as part of a qualified child care facility, for operating costs of a qualified child care facility, and for resource and referral expenditures.
Family Leave Credit
A credit for employers making family leave payments to employees. The credit is only available to employers who have a written policy in place for the payment and credit. The credit expires after 2019, barring legislation to extend it, so employers who make these payments, and want to claim the credit should make sure to do so while they can.
Taxpayers (individuals or corporations) purchasing equipment may make a §179 election, which allows them to expense (i.e., currently deduct) otherwise depreciable business property, including computer software and qualified real property. Air conditioning and heating units placed in service since 2016 are eligible and continue to be eligible for this deduction. Certain improvements to nonresidential real property (roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems) that may not be eligible for bonus depreciation are eligible under §179.
For 2019, taxpayers may elect to expense up to $1,020,000 of equipment costs (with a phase-out for purchases in excess of $2,550,000). The deduction is subject to a business income limit. In addition, careful timing of equipment purchases can result in favorable depreciation deductions in 2019.
For property acquired after September 27, 2017, and placed in service during 2019, a taxpayer may deduct 100% of the cost of qualified property in 2019. Bonus depreciation applies to new as well as used property.
Vehicles Weighing over 6,000 Pounds:
Purchase a vehicle rated over 6,000 pounds used for business purposes. Doing so would not subject the purchase to the statutory dollar limit for depreciation: $10,100 for 2019, (if bonus depreciation is taken, the 2019 amounts increase to $18,100 for cars, vans, and trucks). Therefore, the vehicle would qualify for the full equipment expensing dollar amount. However, for SUVs (rated between 6,000 and 14,000 pounds gross vehicle weight) the expensing amount is limited to $25,000.
Qualified business income deduction
Beginning in 2018, business owners are allowed to deduct up to 20 percent of their qualified business income (QBI) from sole proprietorships, partnerships, trusts and S corporations. The IRS has released comprehensive guidance on the deduction, which provides a great deal of clarification on the requirements of the deduction. This is a completely new deduction, with new documentation requirements, which may require a year-end review of records. The credit also is reduced, and eventually eliminated, for certain businesses once the income exceeds certain amounts, so a year-end review may be helpful to get the most out of the deduction.
Limitation on Business Interest:
The deduction for net interest expenses incurred by a business is limited to the sum of business interest income, 30% of the business’s adjusted taxable income, and floor plan financing interest, though businesses with average annual gross receipts of $25 million or less are exempt from the limit.
These are just some of the considerations that can yield tax savings for your business as year-end 2019 approaches. Please feel free to contact Fred Schutz, Director of the Tax Department, at firstname.lastname@example.org or at 856-722-5300 ext. 201, to discuss specific 2019 year-end strategies and issues that might be particularly worthwhile for your business.