If you’re thinking 2019 profit has resulted in a bit more taxable income than you would like here are a few things you can do to do a bit of business tax planning. You can also call Carol and make an appointment. She’d love to see you. Hurry though, as appointment times are filling up quickly.
Depreciation is super important from both book and tax perspectives primarily because it is a non cash deduction that reduces profit and taxable income. For tax purposes though it is possible to get the whole pie in one sitting and not just a piece of it.
100% First-year Bonus Depreciation. The TCJA took bonus depreciation from 50% all the way to 100% for big stuff (qualifying assets) you buy and start using (placed in service) between September 28, 2017, and December 31, 2022. A few even bigger ticket items that last longer, like airplanes and other transportation equipment have until December 31, 2023.
This is a great planning opportunity, three more years to purchase capital assets that can make your business better, faster, stronger and more profitable. Starting in 2023 the bonus depreciation percentage is reduced yearly by 20%, until it’s gone in 2026 (or 2027 for those longer lasting, bigger ticket items).
Bonus depreciation is allowed for both new and used qualifying assets. This means as long as an asset with a MACRS recovery period of 20 years or less is “new to you”, you can get the maximum allowable deduction. This pretty much includes tangible, personal property as long as you didn’t use it before you bought it. So, if you are in the market for a vehicle, office equipment, heavy equipment or machinery the current, estimated tax savings are huge. Even better, the TCJA threw in off the shelf computer and business software as qualifying assets.
Keep in mind that Bonus Depreciation cannot be taken when the depreciable item is purchased from a related person. There are quite a few related persons relationships. Common ones in small business transactions are:
1. An individual and a member of his/her family, including a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant;
2. A corporation and an individual who directly or indirectly owns more than 10% of the value of the outstanding stock of that corporation;
3. Two corporations that are members of the same controlled group; and,
4. Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 10% of the value of the outstanding stock of each corporation.
Other related person relationships are found within and between partnerships, estates and trusts, and grantors and fiduciaries to name a few. We will be discussing related persons in a future blog.
Also, Bonus Depreciation is mandatory; you can, however, elect out of it. The opt out will apply to everything placed in service that year in that class of property.
Planning Tip. Bonus Depreciation is not limited to business income; it can be used to generate a net operating loss (NOL). The benefit here is NOLs can be carried forward.
Planning Tip. There is no Bonus Depreciation for HVAC items. If you make any HVAC purchases and installations, use Section 179.
Planning Tip. Generally, you can buy things from in-laws and step parents/children.
Expanded Section 179 First-Year Depreciation Deductions. The TCJA was also very good to Section 179 Depreciation Deductions. Section 179 is now HUUUUGE. The maximum first-year deduction has more than DOUBLED to a whopping $1,020,000 and is not completely phased out until $2.5 mil. Real property, though, is still NOT included!
The TCJA also made Section 179 even bigger by adding something new called Qualified Improvement Property (QIP). QIP makes the inside of real property you don’t live in or rent better unless it makes the building bigger, is inside structural framework, or is an elevator/escalator. QIP is also fire protection systems, alarm and security systems. And it gets better – roofs, even though they are on the outside, count as QIP.
And HVAC counts as QIP (and is not eligible for bonus depreciation). This will be a future blog topic.
The TCJA also provides a benefit to lodging entities, tangible personal property like beds, TVs and the usually ugly wall hangings – all can be “179’d”.
Keep in mind, that like all things tax, the deduction is subject to several limitations including taxpayer business income limitations and related person restrictions.
Planning Tip. When both 100% first-year bonus depreciation and the Sec. 179 deduction are available for the same asset, it’s generally more advantageous to claim 100% bonus depreciation, because there are no limitations on that break.
Planning Tip. Disallowed Section 179 Depreciation Deductions can be carried forward.
De Minimis Safe Harbor Election. This really cool you don’t have to depreciate mechanism is continued under the TCJA as long as what you buy isn’t inventory related (UNICAP rules). Basically, as long as a single item doesn’t cost more than $5,000 if you’re an audit client and $2,500 if you’re not audited, the expenditure goes straight to the income statement. If you’re not audited there is no requirement for a written capitalization policy.
The election is properly made by attaching a statement to each year’s timely filed return.
Planning Tip. In addition to more immediate tax savings, this election has the added benefit of reduced record keeping time.
Passenger Vehicles Used for Business. This is the under 6,000 pounds category that includes car, light trucks and vans. Maximum depreciation deductions allowed for these vehicles placed in service in 2019:
|Tax Year||Less than 50% use OR Adopts out of Bonus Depreciation||More than 50% use OR Bonus Depreciation|
|Thereafter & Forever More||$5,760||$5,760|
There is a whole other separate list of rules for leased vehicles that are valued at greater than $50,000, the primary one being inclusion amounts. Inclusion amounts are nominal amounts that are added to the lessee’s personal income every year of the vehicle lease. Inclusion amounts also kick in with some other types of property when business use falls to below 50%.
Planning Tip. Keep business use over 50%.
Cash vs Accrual. The TCJA has made the cash method of accounting available to more small businesses than ever before by increasing annual gross receipts from 5 million to 25 million. This is a huge win for C-Corps and businesses with inventory.
Planning Tip. Cash basis makes it much easier to shift income by accelerating and deferring income and expense items.
Planning Tip. Cash basis defers revenue solely from the tax perspective with no impact on book earnings. When receivables are greater than payables, defer the revenue/taxable income to the next year.
Retirement Contributions. SEP Plans. If you own a small business and haven’t yet set up a tax-favored retirement plan for yourself, you can establish a simplified employee pension (SEP). Unlike other types of small business retirement plans, a SEP can be created this year and still generate a deduction on last year’s return.
In fact, if you’re self-employed and timely extend your calendar-year 2019 personal tax return, you’ll have until October 15, 2020, to take care of the paperwork and make a deductible contribution for last year. The deductible contribution can be up to:
20% of your 2019 self-employment income, or
25% of your 2019 salary if you work for your own corporation.
The absolute maximum amount you can contribute for the 2019 tax year is $56,000.
Planning Tip. You may not want a SEP if your business has employee because you might have to cover them and make contributions to their accounts. That could be cost prohibitive.
Planning Tip. A lot of bang for this buck, not only less tax paid but more savings growth.
Christmas Wish List. Perhaps the very best way to lower 2019’s business income is to reward employees with a Holiday Bonus. Holiday bonuses are considered by the IRS to be discretionary so they are not subject to overtime pay rules. Nothing makes an employee feel appreciated like a bonus.
Planning Tip. There is much more bang in a buck that gives a bonus than a buck that pays income tax.
WHAT ELSE SHOULD I KNOW?
→ The last day to accomplish most 2019 planning goals is December 31.
→ Both Bonus Depreciation and Section 179 are not prorated, meaning if you buy it December 31st AND put it into play December 31st, you get 100% of the allowable deduction.
→ Estates and trusts cannot take (elect) Section 179.
→ Qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property are no longer separately defined and no longer have a 15-year recovery period under the new law. If you’re interested in this let us know and we can make it a future blog topic.
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