Year-End Tax Planning for Businesses

The first year of filing under the new Tax Cuts and Jobs Act (TCJA) is in the books. With most of the provisions taking effect for the 2018 tax year, corporations saw a substantial reduction in their tax rate from 35% to a flat 21%, and some owners of pass-through entities saw a large reduction in tax with the qualified business income deduction.

While the 2019 tax year doesn’t bring massive tax law changes, businesses need to remain vigilant and take advantage of the planning opportunities that do exist.

Typically as year-end draws near, businesses can save money on taxes by appropriately timing strategies, by taking deductions and by allocating money on specific items. There are also a couple provisions expiring and changes occurring at the end of 2019 that businesses should be aware of.

Paid Family Leave Tax Credit Expires

The TCJA includes a tax credit for businesses that provide paid family and medical leave benefits to employees beginning January 1, 2018 through the end of 2019. As an incentive to small businesses that are not required to have a Family Medical Leave Act (FMLA), the act encourages that businesses put an eligible policy in place before yearend to qualify for the tax credit.

Bonus Depreciation

The IRS issued final regulations last month regarding the 100% bonus depreciation for qualified business assets, adopting the August 2018 proposed regulations with some modifications in response to comments. The 100% bonus depreciation for qualified business assets is set to expire after 2022, with declining percentages for 2023 through 2026.

Under these final regulations, the IRS includes clarifying guidance on the requirements that must be met for property to qualify for the deduction under Sec. 168(k), including used property. They also added rules for qualified film, television, and live theatrical productions. Lastly, the IRS outlined how the basis of property that is subject to the alternative depreciation system is determined when it otherwise qualifies for bonus depreciation. 

As similar to last year’s guidance, it is a good time to buy if you are considering purchasing new business assets, as the TCJA increased the Section 179 expense limit from $510,000 to $1 million and increased the threshold to $2.5 million. TCJA expanded Section 179 definition to include:

• Certain tangible personal property used primarily to furnish lodging.
• Certain improvements to nonresidential real property, such as roofs, HVAC, fire protection, and alarm and security systems.

Opt for the Cost Segregation Study

Speaking of bonus depreciation, if a taxpayer has purchased or plans to purchase real estate by the end of the year to use as a rental property or to use for business purposes, a cost segregation study is now considerably more valuable in the TCJA era. A cost seg study can determine the bonus depreciation on external land improvements and internal building contents.

Often when constructing a new building, undergoing a major remodel or acquiring used property, a cost segregation study allows a taxpayer to identify assets that are being depreciated as 27.5 or 39-year property and reallocate them to five, seven or 15-year personal property. This reallocation accelerates depreciation deductions and reduces tax liability in the beginning phases of the real estate ownership.

Section 199A Deduction

If you are an owner of a pass-through entity (partnerships, S corporations, and sole proprietors), you may be able to take advantage of new planning opportunities due to recently-passed final regulations under Section 199A. The 199A deduction could potentially reduce a pass-through owner’s maximum individual tax rate from 37 percent to 29.6 percent, and with newly-issued regulations, owners could also potentially separate non-qualifying Specified Service Trade or Businesses (SSTBs) from qualifying trades or businesses. The lower tax rate could then be applied to the eligible activities that would have previously been reworked as a SSTB due to the associative nature of the activity.

It’s important that taxpayers first determine the complex criteria needed to qualify for the Section 199A deduction during year–end tax planning and take into consideration entity choice post-tax reform.

Review S-Corp Compensation Structure

It is always a good time of year to review the owner’s salary of an S Corporation to ensure that it meets the “reasonable compensation” standard. If the owner has not yet taken a salary, it is important that it is done by Dec. 31.

SALT Deduction

The new $10,000 deduction cap on state and local taxes greatly restricts many taxpayers in deducting the full amount of their property tax bill on their federal return. If possible, taxpayers should protect those real estate tax deductions by allocating them to a business return where applicable, as the general business deductibility rule is not affected by the SALT regulations.

On the Horizon – Proposed Retirement Plan Changes

There are a number of proposed retirement plan changes that may affect you and your business in the future. 

Still sitting in the Senate—but passed by a 417-3 vote in the House of Representatives—the Secure Act aims to provide overall expanded access to retirement plans.

Should the Secure Act pass into law, it entails measures that will allow part-time workers entrance into retirement plans, shift the minimum distribution age for retirement accounts from 70 ½ to 72 years old, eliminate withdrawal penalties for the birth or adoption of a child, and impose a 10-year time limit for RMDs on non-spouse beneficiaries inheriting IRAs, among other features.

We’ll keep you apprised of any changes or issuances as the proposed bill makes its way through Congress.

It’s Time to Start Planning

The abovementioned planning strategies are only the tip of the iceberg, as there are a number of other opportunities that businesses can incorporate into year-end tax planning strategies. Contact me at cknepler@bpw.com or (805) 963-7811 if you have any questions regarding the update or if you are ready to get started.