2019 Business Planning Guide
All businesses seek to reduce costs, and year-end tax planning presents the opportunity for significant savings that affect your bottom line. The Tax Cuts and Jobs Act of 2017 created a myriad of challenges for businesses of all types. But along with the challenges are opportunities for businesses to leverage timely tax strategies to lower their tax liabilities. Additionally, planning for closely-held entities requires a delicate balance between planning for the business and its owners.
Presented below are just some of the year-end steps that can be taken to save tax dollars. By contacting us, we can provide a comprehensive review of the tax-saving opportunities individualized to your business.
Review your accounting records, or have us check them, to make sure you have accurate information. Make sure your account reconciliations are complete and correct, and review old outstanding items. Once you have a reasonably accurate net income amount, you can project to the end of the year to determine what steps you might need to take.
Evaluate your net income position for 2019 with what you expect for 2020. You may want to accelerate or defer income or expense items to “smooth out” your income.
Section 199A Deduction for Qualified Business Income
Enacted as part of TCJA, the Section 199A tax break allows for up to a 20 percent deduction for “qualified business income” from sole proprietorships, S corporations, partnerships, and LLCs taxed as partnerships.
- The deduction, which is available to bothitemizers and nonitemizers, is claimed by individuals on their personal tax returns as a reduction to taxable income, but is subject to some complicated restrictions and limitations.
- For 2019, if taxable income exceeds $321,400 for a married couple filing jointly or $160,700 for all other taxpayers, the deduction may be limited based on:
- Whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), and
- The amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business.
- The limitations are phased in for joint filers with taxable income between $321,400 and $421,400 and for all other taxpayers with taxable income between $160,700 and $210,700.
Taxpayers may be able to achieve significant savings with respect to this deduction by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2019.
- Depending on their business model, taxpayers also may be able 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 your tax adviser.
Accounting Method Reform
More small businesses are able to use the cash method of accounting in 2019 than were allowed to do so in earlier years, as opposed to the accrual method frequently used in prior years.
- To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test.
- For 2019, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts don’t exceed $26 million (the dollar amount was $25 million for 2018, and for earlier years it was $5 million).
- Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, by paying bills early or by making certain prepayments.
Fixed Asset Depreciation Deductions
Businesses should consider making expenditures that qualify for the liberalized business property expensing option.
- For tax years beginning in 2019, the Section 179 expensing limit is $1,020,000, and the investment ceiling limit is $2,550,000.
- In addition, purchases of new and used assets can qualify for 100% bonus depreciation if you have maxed out your 179 expensing.
Expensing is generally available for most depreciable property, other than buildings, and off-the-shelf computer software.
Additionally, expensing is available for qualified improvement property (generally, any interior improvement to a building’s interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.
- This applies to nonresidential property only.
The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for business equipment.
- The expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning.
- Property acquired and placed in service in the last days of 2019, rather than at the beginning of 2020, can result in a full expensing deduction for 2019.
There are some safe harbor elections available that allow you to expense lower-cost assets and certain materials and supplies. The safe harbor level depends on whether or not you have audited financial statements. The elections should be in writing and in effect as of the beginning of the year.
Tax Obligations and Opportunities under Wayfair
In 2018, the Supreme Court of the United States issued its widely anticipated decision in Wayfair, allowing states to impose a tax payment or tax collection obligation on out-of-state business, regardless of whether the business has a physical presence in the state.
- While Wayfairdealt with remote seller sales and use tax collection obligations, states may now tax a business even if the business has no in-state physical presence.
- Overnight, remote sellers, licensors of software, financial services, franchisors, and other businesses that provide services or deliver their products to customers from a remote location must start complying with state and local taxes.
- Left unchecked, these state and local tax obligations and correlated liabilities from tax, interest, and penalties will grow over time. A business is likely impacted by Wayfairif any of the following apply:
- The business makes sales into states in which it is not registered or filing sales/use tax returns.
- The business ships goods or provides services to customers located in states where it has little or no in-state physical presence.
- The business makes retail sales of tangible goods.
- The company provides online services or makes sales of digital goods.
- The business licenses software or provides access to software.
- The business received a “nexus questionnaire” or received audit or tax notices from any state where it is not currently registered for sales/use taxes.
Businesses for which any of the above apply should take steps to minimize potential exposures from tax, interest, and penalties that may arise from Wayfair, and plan around the very fluid state changes that are happening and will occur in the near future. Please contact us to discuss strategies if you conduct business with customers in multiple states.