Tax Guy: Own a small business? Here’s your year-end tax planning game plan

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With year-end rapidly approaching, now is the time to take steps to cut your 2019 business tax bill. This column has some ideas for this year, but you also have to think what might happen to your business tax situation in 2020 and beyond. So, it’s a bit complicated this time around. But we forge ahead. Here goes.

Establish tax-favored retirement plan

If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Our current tax rules allow for significant deductible contributions. For example, if you are self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $56,000 for 2019. If you are employed by your own corporation, up to 25% of your salary can be contributed with a maximum contribution of $56,000.

Other small business retirement plan options include the 401(k) plan which can even be set up for just one person, the defined benefit pension plan, and the SIMPLE-IRA. Depending on your circumstances, these other types of plans may allow bigger deductible contributions.

See also: What the IRS doesn’t tell you about self-employment taxes

The deadline for setting up a SEP-IRA for a sole proprietorship business and making the initial deductible contribution for the 2019 tax year is October 15, 2020 if you extend your 2019 return to that date. Other types of plans generally must be established by December 31, 2019 if you want to make a deductible contribution for the 2019 tax year. The deadline for the contribution itself is the extended due date for your 2019 personal return.

However, to make a SIMPLE-IRA contribution for 2019, you must have set up the plan by October 1 of this year. So, you’ll have to wait until next year if the SIMPLE-IRA option is appealing. And next year will be here before you know it.

Claim 100% first-year bonus depreciation for qualified asset additions

Thanks to the Tax Cuts and Job Act (TCJA), 100% first-year bonus depreciation is available for qualified new and used property that is acquired and placed in service in your business in calendar year 2019. That means your business might be able to write off the entire cost of some or all of its 2019 asset additions on this year’s return. So, consider making additional acquisitions between now and year-end.

Claim 100% bonus depreciation for heavy SUV, pickup, or van

The 100% bonus depreciation provision can also have a hugely beneficial impact on first-year depreciation deductions for new and used heavy vehicles used over 50% in your business. That’s because heavy SUVs, pickups, and vans are treated for tax purposes as transportation equipment, and that means they qualify for 100% first-year bonus depreciation.

However, 100% bonus depreciation is only available when the SUV, pickup, or van has a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. The GVWR of a vehicle can be verified by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door where the door hinges meet the frame. If you are considering buying an eligible vehicle, doing so and placing it in service before the end of this tax year could deliver a juicy write-off on this year’s return.

Claim bigger first-year depreciation deductions for car, light truck or van

For both new and used passenger vehicles (meaning cars and light trucks and light vans) that are acquired and placed in service in 2019 and used over 50% for business, the TCJA dramatically increased the so-called luxury auto depreciation limitations. For passenger vehicles that are acquired and placed in service in 2019, the luxury auto depreciation limits are as follows.

* $18,100 for Year 1 if bonus depreciation is claimed or $10,100 if not.

* $16,100 for Year 2.

* $9,700 for Year 3.

* $5,760 for Year 4 and thereafter until the vehicle is fully depreciated.

These allowances are much more generous than before the TCJA. Deductions for vehicles that are used less than 100% for business but more than 50% are cut back proportionately.

Key Point: For 2019, the aforementioned luxury auto depreciation limits can only apply to vehicles that cost more than $50,500. Vehicles that cost less are depreciated under the “regular rules” using the following annual depreciation rates. Consult your tax pro for full details.

Year Depreciation deduction based on depreciable cost
1 20%
2 32%
3 19.2%
4 and 5 11.52%
6 5.76%
Cash in on generous Section 179 depreciation deductions

For qualifying property placed in service in tax years beginning in 2019, the TCJA increased the maximum Section 179 deduction to $1.02 million. The Section 179 deduction phase-out threshold amount was increased to $2.55. The following additional beneficial changes were also made by the TCJA.

Property used for lodging

The TCJA removed the prior-law provision that disallowed Section 179 deductions for personal property used to furnish lodging or in connection with furnishing lodging. Examples of such property would apparently include furniture, kitchen appliances, lawn mowers, and other items used in the living quarters of a lodging facility or in connection with a lodging facility such as a hotel, motel, apartment house, rental house or condo, or other facility where sleeping accommodations are made available and rented out.

Qualifying real property

As before the TCJA, Section 179 deductions can be claimed for qualifying real property expenditures, up to the maximum annual Section 179 deduction allowance ($1.02 million for tax years beginning in 2019). There is no separate limit for qualifying real property expenditures, so Section 179 deductions claimed for real property reduce the maximum annual allowance dollar for dollar. Qualifying real property means any improvement to an interior portion of a nonresidential building that is placed in service after the date the building is first placed in service, except for expenditures attributable to the enlargement of the building, any elevator or escalator, or the building’s internal structural framework.

The TCJA expanded the definition of real property eligible for the Section 179 deduction to include qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property. To qualify, these items must be placed in service after the nonresidential building has been placed in service.

First-year depreciation and future tax rates

The current federal income tax rates for both individuals and corporations are pretty low by historical standards. While claiming first-year 100% bonus depreciation and first-year Section 179 deductions will save current-year taxes, forgoing these first-year breaks and instead depreciating assets over their “normal” extended depreciation periods (for example, six years for autos and 39 years for most nonresidential real estate) could save you more in the long run — if tax rates go up.

The rates for 2020 will almost certainly be the same as this year’s rates — unless we have a new president after the 2020 election and that new president and the new Congress decide impose a retroactive tax increase for 2020. While that could happen, it has rarely been done and is probably unlikely. I hope. What might happen in 2021 and beyond is anybody’s guess.

On the other hand, if we don’t have a new president after next year’s election, the current favorable tax rates under the TCJA are scheduled to last through 2025.

Key Point: The good news is you can extend your 2019 return until well into next year, and see how the politics appear to be shaking out. So, you would have some time to figure out exactly what to do on this year’s return.

Time business income and deductions for tax savings

If you conduct your business using a pass-through entity — meaning a sole proprietorship, S corporation, LLC, or partnership — your shares of the business’s income and deductions are passed through to you and taxed at your personal rates.

Assuming the current tax rates still apply in 2020, next year’s individual federal income rate brackets will be the same as this year’s — with modest bumps for inflation. In that case, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2019 until 2020.

On the other hand, if you expect to be in a higher tax bracket in 2020, take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2020. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate.

Key Point: If tax rates are increased for 2021 and beyond, the standard income deferral strategy might not work next year. You might need to take the opposite approach and accelerate income from 2021 into 2020 to get it taxed at a lower rate. We shall see.

Up next

In my next column, we’ll cover updating your estate plan, and it won’t just be advice for “the rich.” Please stay tuned for that.

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