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Year-End Business Tax Strategies

  • Defer Income until 2023- Although C corporations enjoy a flat 21 percent statutory tax rate and pass-through entities are taxed at lower rates following the TCJA, income deferral remains an important consideration in business tax planning. If a taxpayer expects taxable income to be higher in 2022 rather than 2023, or if the taxpayer anticipates being taxed at a higher rate in 2022 than 2023, the taxpayer may benefit by deferring income into 2023. Of course, if a business owner is subject to the individual alternative minimum tax (AMT), or an S corporation is subject to the passive investment income tax, this type of standard tax planning may not be warranted.

  • Maximize the Section 199A QBI Deduction – Taxpayers other than corporations operating a “qualified trade or business” (QTB) may be eligible for up to a 20 percent deduction of qualified business income (QBI). However, for 2019, if taxable income exceeds certain amounts ($321,400 for married filing joint, $160,700 for single or head of household, and $160,725 for married filing separate), the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business such as accounting, law, health, or consulting; the amount of W-2 wages paid by the business; and/or the basis of certain qualified property held by the business. In order to stay under the taxable income limits and maximize the deduction, consider deferring income into 2020.

  • Prepay Expenses Using the IRS Safe Harbor.  IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.  Under this safe harbor, your 2019 prepayments cannot go into 2021. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.

  • Take Advantage of Bonus Depreciation - For property acquired after September 27, 2017, and placed in service during 2019, a taxpayer may deduct 100 percent of the cost of qualified property in 2019. Bonus depreciation applies to new as well as used property, so taxpayers planning to acquire a business should consider whether structuring the acquisition as an asset acquisition rather than a stock acquisition may be advantageous. 

  • Consider Equipment Purchases – Businesses purchasing equipment may make a “§179 election” which allows for a current deduction (i.e., expense) of otherwise depreciable business property, including computer software and qualified real property. 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 for the §179 election. For 2019, taxpayers may elect to expense up to $1,020,000 of equipment costs (with a phase-out for purchases exceeding $2,550,000).

  • Purchase New Business Vehicles Weighing over 6,000 Pounds – Another popular strategy is to purchase a vehicle for business purposes that exceeds statutory depreciation limits (i.e., a vehicle rated over 6,000 pounds). Doing so would not subject the purchase to the $10,100 limit for depreciation for cars, vans, and trucks (if bonus depreciation is taken, the amount increases to $18,100). As a result, the vehicle would qualify for the full equipment expensing dollar amount. However, for SUVs, the expensing amount is limited to $25,000.

  • Accelerate Bad Debts – If a business uses the accrual method, 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.

  • Accelerate 2019 Employee Bonuses – In general, an employer’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 employer does not have a unilateral right to cancel the bonus prior to payment. Generally, the employer may accelerate the 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.

  • Accelerate Tax Payments into 2019 – For taxpayers that pay payroll and other taxes on a quarterly basis, consider accelerating 2019 4th quarter payroll and other taxes at December 31 year-end instead of waiting until January 15, 2020. Also consider accelerating state income and other types of tax payments if your business might benefit from a 2019 deduction.

  • Put your retirement plan in place no later than December 31 so you are absolutely sure that you have a plan. In fact, be sure to make a contribution to the plan before December 31. 

  • If you have not implemented your qualified small employer HRA (QSEHRA), make sure to get that done properly now. If you have not yet put a QSEHRA in place and you plan to do so on January 1, do that now and just suffer that $50-per-employee penalty should you be found out. Alternately, consider implementing an individual care HRA (ICHRA) in 2020.

  • If you operate your business as an S corporation and you want an above-the-line tax deduction for the cost of your health insurance, you need the S corporation to (a) pay for or reimburse you for the health insurance and (b) put it on your W-2. Make sure that the reimbursement happens before December 31 and that you have the reimbursement set up to show on the W-2.

  • Put Your Children on Your Payroll.  If you have a child under the age of 18 and you operate your business as a Schedule C sole proprietor or as a spousal partnership, you absolutely need to consider having that child on your payroll. Why? First, neither you nor your child would pay payroll taxes on the child’s income.   Second, with a traditional IRA, the child can avoid all federal income taxes on up to $18,200 in income.  If you operate your business as a corporation, you can still benefit by employing the child even though you and the child have to pay payroll taxes

Take Action Now to Realize Tax Savings Before It’s too Late

These are just a few of the options businesses have to minimize their 2019 tax liability, but they must act fast if they want to obtain these savings. 

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