Smart Year-End Tax Planning for Business Owners

Check out these business tax planning moves before the year ends.

It’s been an unusual year to say the least for most businesses. Business tax planning for 2020 brings an extra dimension.

Business Tax Changes:

Many business tax changes from recent years generally remain in place, including:

• A major corporate tax rate reduction and elimination of the corporate AMT.
• Generous expensing and depreciation rules for businesses.
• Non-corporate taxpayers with certain income from pass-through entities may still be entitled to a valuable deduction.

Year-End Tax Planning Moves for Businesses

Qualified Business Income Deduction

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income.

Taxpayers may be able to achieve significant savings with respect to this deduction. Deferring income or accelerating deductions may be needed to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2020.

Depending on your business model, you may also be able to increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so don’t make a move in this area without consulting us.

Business Property Expensing

Businesses should consider making expenditures that qualify for the liberalized business property expensing option.

For tax years beginning in 2020, the expensing limit is $1,040,000, and the investment ceiling limit is $2,590,000.

Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for qualified improvement property.

Bonus Depreciation Tax Deduction

Businesses can claim a 100% bonus first year depreciation deduction for:

• Used machinery and equipment bought (with some exceptions)
• New machinery and equipment if purchased and placed in service this year
• Qualified improvement property

De Minimis Safe Harbor Election

Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies.

Net Income in 2020

Situation: A corporation (other than a large corporation) anticipates a small net operating loss (NOL) for 2020 and a substantial net income in 2021.

Planning move: Consider accelerating just enough of your company’s 2021 income (or to defer just enough of its 2020 deductions) to create a small amount of net income for 2020. This will permit the corporation to base its 2021 estimated tax installments on the relatively small amount of income shown on its 2020 return.