Dec 04 2019 YEAR-END TAX ADVICE: BUSINESS TAX SAVING MOVES
Most of the provisions of the Tax Cuts and Jobs Act (TCJA) went into effect in 2018. With the first TCJA tax season behind us, we move from questioning “How does the new tax law affect me?” to “What tax planning can I do now to minimize my taxes under the new tax law?”. This Tax Alert provides business year-end tax planning opportunities to consider before year-end.
For even more information on tax strategies, reference Sax’s 2019-2020 Tax Planning Guide here.
Business Tax Saving Moves
- Maximize your 20% Qualified Business Income (QBI) Deduction
- Under the TCJA, business owners can deduct 20% of their qualified business income. Thus, the higher your business’s QBI, the higher the deduction.
- Instead of the business making charitable contributions, maximize QBI by distributing cash from the business to the owner, and have the business owner make the charitable contributions. Be sure to consider any basis issues and whether the owners will benefit from the donation on their personal return.
- If your QBI deduction is limited because your taxable income on your personal tax return is too high, consider reducing your income by doing the following:
- Contribute to an employer retirement plan
- Make a deductible contribution to an Individual Retirement Account (IRA)
- Contribute to a Health Savings Account (HSA)
- Defer business income or accelerate business expenses
- Increase your itemized deduction by “bunching” medical and/or charitable deductions into one tax year. (See “Individual Tax Saving Moves” here)
- Boost Tax Savings by Purchasing Equipment & Vehicles
- Cash in on immediate write-offs of most depreciable assets. Consider purchasing fixed assets by year-end that qualify for full expensing through a Sec. 179 deduction or bonus depreciation. The asset must be placed in service by December 31, 2019.
- One type of asset that could deliver a big write-off on your 2019 tax return is a “heavy” vehicle. This includes SUVs, pick-ups and vans that are used over 50% for business.
- Even if cash is tight, you can still benefit from this immediate write-off since the deduction is the same whether the asset is purchased outright, leased or financed.
- State Apportionment Review
- As states are more aggressively scrutinizing apportionment methods, it is important for businesses to correctly identify any potential state filing requirements for the year. Before year-end, extrapolate estimate apportionment data for Q1-Q3 of 2019 and Q4 of 2018 to identify the activity in each state. Forward this data to your tax professional who can assist you with determining any potential state filing requirements for 2019 and suggest planning opportunities to circumvent state exposure.
Top Accounting / Bookkeeping Moves Considerations
- Meals and Entertainment
- Most of the time, meals and entertainment expenses are grouped together into one general ledger expense account. With the passing of the TCJA, the deductibility of these items changed. Make sure expenses for meals, entertainment and travel are recorded in separate general ledger accounts based on deductibility:
- Holiday party, employee events = 100% deductible
- Meals, de minimis snacks (i.e., coffee, donuts, bottled water) = 50% deductible
- Entertainment = nondeductible
- Most of the time, meals and entertainment expenses are grouped together into one general ledger expense account. With the passing of the TCJA, the deductibility of these items changed. Make sure expenses for meals, entertainment and travel are recorded in separate general ledger accounts based on deductibility:
- Nonresident tax payments paid on behalf of partners or shareholders should be treated as distributions, not as a business expense.
- Accrue for current year distributions that will not be paid until 2020.
- Does your business have a Capitalization Policy? Be sure this is followed.
- Write-offs and write-downs to save on taxes
- Review your list of equipment. Are there any items that are obsolete or worthless beyond repair? If so, write them off.
- Improvements vs. Repair
- Check to make sure major expenditures are recorded properly. Classifying an expenditure as a repair is more beneficial since repairs are treated as an expense in the current year as opposed to improvements which are capitalized and written off (deducted) over time.
- Here are general guidelines you can use to determine if an item should be expensed as a repair or capitalized as an improvement –
- Repairs –
- Work that restores property to its original state
- Routine maintenance (activities your business reasonably expects to perform more than once during the property class life – 10 years for most equipment)
- Examples of repairs – repaving a parking lot, replacing a portion of a roof and interior /exterior painting
- Improvements –
- Work that increases the value of property or extends its life
- Upgrades to existing items
- Improvements are usually labor intensive and typically cost substantially more than repairs
- Examples of improvements – replacing entire roof, enlargement of building
- Repairs –
Payroll / Year-End Information Reporting Reminders
- Make sure all employee and independent contractor information is on file and up to date.
- Verify SSNs and EINs are accurate
- Check that Form W-4 is on file for all employees and Form W-9 for non-employees. This avoids scrambling around in January when processing Forms W-2 and 1099-MISC.
- Start preparing for Affordable Care Act (ACA) Annual Reporting if your business is subject to ACA reporting requirements. Evaluate whether proper data collection is in place to meet these reporting requirements.
Reminder for S-Corporation Owners– Before finalizing your year-end payroll, don’t forget to include shareholder-employee medical insurance premiums in wages. This includes premiums paid by the S-corporations for the shareholder’s spouse and dependents. Health insurance premiums are additional wages reportable in Box 1 (wages), Box 16 (state wages) and Box 14 (Other).
In Conclusion
The best way to reduce taxes is with year-end tax planning. Waiting until next year when your tax return is filed may be too late to implement many tax saving strategies. By asking the right questions now and understanding your financial goals, the Sax advisors are able to customize tax strategies around your specific business and individual needs. For any questions or issues with regards to your tax planning, lean on a tax advisor at Sax for expert guidance. Reach out anytime at (973) 472-6250.
