Smart tax planning starts with knowing when you need to ask for guidance. The tax professionals at Accel can help you take advantage of tax opportunities. Year-round tax planning is key to finding the most deductions you may be able to claim on your tax return. At the same time, it keeps you on top of your taxes while also avoiding a panic at tax time.
Accel is committed to providing industry-specialized tax services to fit your unique business challenges and opportunities. We are your resource on the latest tax incentives and can help you strategically apply them to your situation.
Effective tax planning can go a long way toward helping you accomplish your financial goals. While the demands of running your business may keep you on your toes, it’s important to sit down and review your tax strategy.
Optimize the way your business is structured.
A proper business structure is the starting point for our comprehensive tax planning. For example, there are often tax savings available from electing Subchapter S corporation status. Often business owners will be able to significantly reduce payroll taxes by taking a lower salary, with the remaining profit distributed as a dividend (not subject to payroll taxes). S corporation status can also reduce income and payroll taxes on the sale of your business and lower IRS audit risk and exposure. However, S corporation status is not appropriate for all businesses. There are still advantages for some businesses to be taxed as C corporations or partnerships. That is why proper entity selection requires the help of a tax professional.
Know your options for maximizing retirement plan contributions.
If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Current retirement plan 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 $57,000 for 2020. If you are employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $57,000.
Other small business retirement plan options include the 401(k) plan which can even be set up for just one person (a sole-called solo 401(k)), the defined benefit pension plan, and the SIMPLE-IRA. Depending on your circumstances, these other types of plans may allow bigger deductible contributions.
The deadline for setting up a SEP-IRA for a sole proprietorship business and making the initial deductible contribution for the current tax year is October 15 if you extend your return to that date. Other types of plans generally must be established by December 31 if you want to make a deductible contribution for the current tax year, but the deadline for the contribution itself is the extended due date for your tax return. However, to make a SIMPLE-IRA contribution for the current year, you must have set up the plan by October 1. So you might have to wait until next year if the SIMPLE-IRA option is appealing.
Contact the tax professionals at Accel for more information on small business retirement plan alternatives, and be aware that if your business has employees, you may have to cover them too.
Properly classify your travel expenses.
Be sure to separate fully deductible travel, lodging, and continuing education expenses from meal and entertainment expenses (meal expenses are 50% deductible, and entertainment expenses are not deductible at all) for tax reporting purposes. In addition, make sure all meal expenses for staff meetings, functions, and outings are classified as “office expenses” since they remain fully deductible under Section 274(n) of the Internal Revenue Code.
Claim 100% bonus depreciation for asset additions
Thanks to the new tax law, 100% first-year bonus depreciation is available for qualified new and used property that is acquired and placed in service in calendar year 2018 and beyond. That means your business might be able to write off the entire cost of some or all of your asset additions on this year’s return. So consider making additional acquisitions between now and year-end. Contact us for details on the 100% bonus depreciation break and what types of assets qualify.
Claim 100% bonus depreciation for heavy SUV, pickup or van
The 100% bonus depreciation provision can have a hugely beneficial impact on first-year depreciation deductions for new and used heavy vehicles used over 50% for business. That’s because heavy SUVs, pickups, and vans are treated for tax purposes as transportation equipment, and that means they qualify for 100% bonus depreciation. Specifically, 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. You can verify a vehicle’s GVWR 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.
Cash in on more generous Section 179 deduction rules
For qualifying property placed in service in tax years beginning in 2018, the TCJA increased the maximum Section 179 deduction to a whopping $1 million (up from $510,000 for tax years beginning in 2017).
Qualifying real property
Section 179 deductions can be claimed for qualifying real property expenditures, up to the maximum annual Section 179 deduction allowance ($1 million for tax years beginning in 2018). 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.
Consider a cost segregation study for buildings
Cost segregation studies allow businesses to carefully examine their properties and shorten their depreciation time for tax purposes. By shortening the depreciation time for qualified assets business owners incur a higher annual depreciation expense and lower their tax bill. Cost segregation studies are an engineering-based approach to allocate building costs among the various building components to maximize depreciation expense by classifying qualified assets into shorter lives. IRS rules generally allow businesses to depreciate commercial buildings over 39 years. Often a business will depreciate the structural components (walls, windows, HVAC, plumbing, wiring, etc.) with the same depreciation life. A cost segregation study identifies and reclassifies a building’s non-structural elements, land improvements, and indirect construction costs to identify those items that can be depreciated over a shorter tax life from the building itself. For example, a building’s walls, flooring, ceiling, and plumbing can be depreciated over shorter time frames, such as 5, 7, and 15 years, than the standard depreciation of 39 years for non-residential real property. These benefits are now even greater with the Tax Cut & Jobs Act.
Cost Segregation studies involve working with your tax advisor and a qualified engineering firm. The engineering firm performs a non-invasive inventory and review of your building and property and classifies each item according to its proper depreciation time. The studies often cost between $8,000 and $15,000 and can yield significant tax savings. Contact a tax advisor at Accel to discuss whether a cost segregation study could benefit your business.
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. Next year’s individual federal income tax rate brackets will be the same as this year’s, with modest bumps for inflation. So 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.
On the other hand, if you expect to be in a higher tax bracket next year, take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until next year. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate.
Maximize the new deduction for pass-through business income
The new deduction based on qualified business income (QBI) from pass-through entities was a key element of the TCJA. For tax years beginning in 2018-2025, the deduction can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income.
For QBI deduction purposes, pass-through entities are defined as sole proprietorships, single-member LLCs that are treated as sole proprietorships for tax purposes, partnerships, LLCs that are treated as partnerships for tax purposes, and S corporations.
The QBI deduction is only available to non-corporate taxpayers which means individuals, trusts, and estates.
The QBI deduction can also be claimed for up to 20% of income from qualified REIT dividends and 20% of qualified income from publicly-traded partnerships (PTPs). So the deduction can potentially be a big tax saver.
Because of various limitations on the QBI deduction, tax planning moves (or non-moves) can unexpectedly increase or decrease your allowable QBI deduction. For example, moves that reduce this year’s taxable income can have the negative side effect of reducing your QBI deduction. So if you are one who can benefit from the deduction, work with your tax pro at Accel to optimize your results on this year’s return.