As this year is about to end, it’s a good idea to make sure you’re on track to reach your company’s goals. It’s also a good time to take advantage of last-minute planning opportunities that could reduce your tax burden. With that in mind, please contact us at your earliest convenience to discuss your tax situation so we can develop a customized plan to address your business’s specific financial needs.
Businesses using the cash method of accounting can defer income into 2020 by delaying end-of-year invoices, postponing the receipt of payment until 2020. Businesses using the accrual method can defer income by postponing the delivery of goods or services until January 2020.
Purchase New Business Equipment
Two of the biggest tax incentives available to any business are the Section 179 expense deduction and the bonus depreciation deduction. Youmay be eligible for both, depending on the amount of your business’s taxable income. These deductions can significantly lower your taxableincome. Asset purchases before year end may be advisable depending on your business needs and whether the extra deduction can be utilized in 2019.
Section 179 Expensing
Under the Section 179 expensing option, you can immediately expense the cost of up to $1.02 million of “Section 179” property placed in service in 2019. This amount is reduced dollar for dollar (but not below zero) by the amount by which the cost of the Section 179 property placed in service during the year exceeds $2.55 million. The Section 179 deduction is also limited to your aggregate taxable income for the year derived from the active conduct of a trade or business. Thus, unlike depreciation, the Section 179 expense cannot be used to reduce income below zero.
Bonus depreciation allows businesses to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017 and before January 1, 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025 and 20% in 2026. Bonus applies to new or used trade or business property. A deduction is available if your business use ismore than 50%. However, if your business use of the property falls to 50% or less, you may be subject to depreciation recapture. Unlike with the Section 179 deduction, there is no taxable income limitation on a deduction for bonus depreciation.
Depreciation Limitations on Luxury, Passenger Automobiles and Heavy Vehicles
The new law changed depreciation limits for luxury passenger vehicles placed in service after December 31, 2017. If the taxpayer does not claim bonus depreciation, the maximum allowable depreciation deduction is $10,000 for the first year.
For passenger autos eligible for the additional bonus first-year depreciation, the maximum first-year depreciation allowance remains at
$8,000. It applies to new and used vehicles acquired and placed in service after September 27, 2017 and remains in effect for tax years throughDecember 31, 2022. When combined with the increased depreciation allowance above, the deduction amounts to as much as
Under tax reform, heavy vehicles including pickup trucks, vans, and SUVs whose gross vehicle weight rating (GVWR) is more than 6,000 poundsare treated as transportation equipment instead of passenger vehicles. As such, heavy vehicles (new or used) placed into service after September 27, 2017, and before January 1, 2023, qualify for a 100% first-year bonus depreciation deduction.
Qualified Business Income Deduction
The amount of the QBI deduction is generally 20% of qualifying business income from a qualified trade or business. A qualified trade or business means any trade or business other than (1) a specified service trade or business, or (2) the trade or business of being an employee.A specified service trade or business is defined as any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investmentmanagement, trading, or dealing in securities, partnership interests, or commodities, and any trade or business where the principal asset of suchtrade or business is the reputation or skill of one or more of its employees. Engineering and architecture services are specifically excluded from the definition of a specified service trade or business.
However, a special rule allows you to take this deduction even if you have a specified service trade or business. Under that rule, the provisiondisqualifying such businesses from being considered a qualified trade or business for purposes of the qualified business income deduction doesnot apply to individuals with taxable income of less than $160,700 (single), $160,725 (married filing separately), and
$321,400 (joint filers). After an individual reaches the threshold amount, the restriction is phased in over a range of $50,000 in taxable income ($100,000 for joint filers). Thus, if your income falls within the applicable range, you are allowed a partial deduction. Once the end of the range is reached, the deduction is completely disallowed.
The QBI is complex, and tax planning strategies can directly affect the amount of deduction, i.e., increase or reduce the dollar amount. As such it is especially important to call the office before year’s end to determine the best way to maximize the deduction.
Rental Real Estate
Rental real estate enterprises operated by individuals and owners of passthrough entities may also qualify for the qualified business income deduction if certain criteria are met. For example, a taxpayer’s rental activity must be considerable, regular, and continuous in scope. In determining whether a rental real estate activity meets this criteria, relevant factors include, but are not limited to, the following:
- the type of rented property (commercial real property versus residential property);
- the number of properties rented;
- the taxpayer’s or taxpayer’s agent’s day-to-day involvement;
- the types and significance of any ancillary services provided under the lease; and
- the terms of the lease (for example, a net lease versus a traditional lease and a short-term lease versus a long-term lease).
Under a safe harbor issued by the IRS, a rental real estate activity will be treated as a business eligible for the special deduction if certain requirements are satisfied, such as:
- separate books and records are maintained to reflect the income and expenses for each rental real estate enterprise;
- for rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year with respect to the rental real estate enterprise (with slightly less stringent requirements for rental real estate enterprises that have been in existence for at least four years);
- contemporaneous records have been maintained, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services; and
- certain compliance requirements are met.
Thus, to qualify for this deduction, it’s important to determine if the safe harbor conditions are met and, if not, whether such conditions can be met by year end. Alternatively, even if the safe harbor requirements are not met, certain actions may be taken to ensure that your real estate business falls within the “trade or business” guidelines for taking the deduction.
Finally, whether a rental real estate enterprise is considered a passive activity with respect to a taxpayer is important in determining whether losses from the activity are deductible. Generally, passive activity losses are only deductible against passive activity income. However, a deduction of up to $25,000 ($12,500 if married filing separately) may be allowed against nonpassive income to the extent an individualactively participates in the rental real estate activities. However, the deduction is subject to a phaseout for individuals with modified adjusted gross income above $100,000 (or $50,000 if married filing separately).
Vehicle-Related Deductions and Substantiation Requirements
Vehicle expense deductions are generally calculated using one of two methods: the standard mileage rate method or the actual expense method. If the standard mileage rate is used, parking fees and tolls incurred for business purposes can be added to the total amount calculated.
Proper substantiation of vehicle expenses is required. Ensure the following are part of your business records with respect to each vehicle used in the business:
- the amount of each separate expense with respect to the vehicle (e.g., the cost of purchase or lease, the cost of repairs and maintenance, etc.);
- the amount of mileage for each business or investment use and the total miles for the tax period;
- the date of the expenditure; and
- the business purpose for the expenditure.
The following are considered adequate for substantiating such expenses:
- records such as a notebook, diary, log, statement of expense, or trip sheets; and
- documentary evidence such as receipts, canceled checks, bills, or similar evidence.
Records are considered adequate to substantiate the element of a vehicle expense only if they are prepared or maintained in such a manner that each recording of an element of the expense is made at or near the time the expense is incurred.
Fringe Benefit/Retirement Programs
Offering a retirement plan, generates tax savings for your business as employer contributions are deductible and the assets in the retirementplan grow tax free. Additionally, a tax credit is available to certain small employers for the costs of starting a retirement plan.
Increasing Basis in Pass-thru Entities
If you are a partner in a partnership or a shareholder in an S corporation, and the entity will be reporting a loss on your Schedule K-1 for the year, you must have enough basis in the entity in order to deduct the loss on your personal tax return. If you do not, you may consider increasing your basis in the entity, for example, by making a capital contribution, in order to take the loss in 2019.
S Corporation Shareholder Salaries
For any business operating as an S corporation, it’s important to ensure that shareholders involved in running the business are paid an amount that is commensurate with their workload. The IRS scrutinizes S corporations which distribute profits instead of paying wages subject to employment taxes. The key to establishing reasonable compensation is being able to show that the compensation paid for the type of workan owner-employee does for the S corporation is similar to what other corporations would pay for similar work. If you are in this situation, we need to document the factors that support the salary you are being paid.
Other Year-End Moves to Take Advantage Of
Self-employed individuals should consider setting up a self-employed retirement plan, if you haven’t already done so.
Small Business Health Care Tax Credit
Small business employers with 25 or fewer full-time-equivalent employees with average annual wages of $54,200 for 2019 tax year may qualify for a tax credit to help pay for employees’ health insurance. The credit is 50% (35% for non-profits) of employer-paid health insurance premiums.
Where possible, end of year repairs and expenses should be deducted immediately, rather than capitalized and depreciated over the life of the asset. Small business without applicable financial statements (AFS) can take advantage of de minimis safe harbor by electing to deduct small purchases of $2,500 or less per purchase or per invoice. Businesses with AFS are able to deduct up to$5,000.
Employer Paid Family and Medical Leave Credit
Last chance to take advantage the employer credit for family and medical leave, whichexpires at the end of 2019. The general business credit equal to 12.5% to 25% of the amount of wages paid to qualifying employees for up to 12 weeks of family and medical leave. A written company policy that meets certain requirements must be in place to benefit from the credit.
Choice of Entity
With the decrease in the corporate tax rate to 21% and the addition of the qualified business income deduction (QBI), it maybe time to reconsider your type of business entity. This is a complex decision. We can help walk you through the pros and cons.
We’re here to help you and ensure you receive the most favorable tax treatment. Please contact our office today at 281-406-8984 to set up your year-end review. Planning can help minimize your tax bill and position you for greater success.