With the end of 2019 drawing to a close, it is time for business owners to begin thinking about tax planning opportunities to take advantage of before 2020 begins. A few of the items mentioned below came about as part of the Tax Cuts and Job Act (TCJA) of 2017. They have been included as a refresher for 2019.
Qualified Business Income Deduction (Code Section 199A)
In general, noncorporate taxpayers having income derived in entities such as partnerships, S corporations, or sole proprietors are able to deduct up to 20 percent of the qualified business income or 20 percent of their taxable income (as defined by Code Section 199A).
If taxable income is above a threshold amount of $321,400 for married filing joint and $160,700 for single. This deduction may also be subject to limitations based on the greater of:
- 50% of the W-2 wages paid with respect to the qualified trade or business, or
- The sum of 25% of the W-2 wages paid with respect to the qualified trade or business, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.
It is particularly important to consider the effect of this deduction when determining year-end bonuses, profit-sharing, as well as other forms of tax planning.
Please keep in mind that in addition to the limitations noted above, there are limitations involving service providers.
Standard Mileage Rate
The Standard Mileage Rate, for those taxpayers who are able to use it, has increased from $0.54 to $0.58.
Meals and Entertainment
In general, the items which remain 50% deductible are food and beverages provided at business meetings or to employees, as well as meals at an entertainment event. Entertainment, amusement, and recreation type events no longer offer any deductibility. Please consider separating out these expenses (as well as travel expenses) in advance of tax return preparation.
While depreciation is not new as a tax reduction strategy, the tax law changes starting in 2018 increased the ability to accelerate the deduction even further. Section 179 which is a code that allows businesses to immediately expense eligible asset purchases. The changes increased the maximum deduction from $500,000 to $1,000,000 and increased phaseouts for purchases from $1,000,000 to $2,500,000. It also expanded what types of property are allowed for the deduction. Like 2018, there is also 100% first-year bonus depreciation for assets placed in service prior to January 1, 2023, which still temporarily replaces the 50% deduction for assets placed in service prior to December 31, 2017. The 100% bonus depreciation will begin to phaseout in 2023. There are certain benefits and negatives of each measure dependent on what state (MA, NH, ME, etc.) a business is in, what type of asset is purchased, and the current financial position of the company. The last big change to depreciation is for luxury automobiles and personal use property. The change increased the annual depreciation for the asset throughout the years it is being depreciated. While purchasing equipment, vehicles, machinery, etc. does provide a tax savings benefit, the company should be mindful to strategically make purchases that will increase future income instead of just a tax saving measure.
With the current decrease in unemployment and an improvement in the economy, employees are harder to find and retain. As a net income reduction measure (in turn tax reduction), businesses should consider bonuses for employees, whether through incentives or through setting work goals. While bonuses should also be contingent on cash flows and the current net income of the company, it is something to consider. For shareholders of a C Corporation or a S Corporation, bonuses provide a way to pay in federal and state taxes if there is a shortfall for projected tax liability on their personal tax returns. The goal is to prevent penalties and interest on underpayment of taxes.
Like the explanation above of retaining good workers and finding new qualified workers, retirement plans are very attractive to potential help in making an employment decision and to keep current workers satisfied. Retirement plans can have multiple benefits. First, certain plans allow the employee to contribute which reduces their taxable income on their personal return. Second, employer contributions reduce the businesses tax liability while providing a non-taxable benefit for the employee. For businesses that do not currently have a retirement plan, there are certain deadlines in place for starting the plan, making contributions, and allowing participating. Each type of plan is different and has competing benefits, costs, and flexibility. For those that already have retirement plans setup in their business, there is also a profit-sharing measure to consider. This is ultimately a discretionary contribution to a 401K plan (if it is stipulated in the plan documents). This can also be completed after the end of the business year and not paid until tax deadlines. Please consider speaking to your tax or financial advisor regarding what options your business currently has regarding retirement plans.
If you have any questions regarding 2019 planning, including any of the items noted above, please reach out to a member of our team.