By Kristina Drzal Houghton, CPA, MST
Year-end tax planning in 2019 remains as complicated as ever. Notably, we are still coping with the massive changes included in the biggest tax law in decades — the Tax Cuts and Jobs Act (TCJA) of 2017 — and pinpointing the optimal strategies. This monumental tax legislation includes myriad provisions affecting a wide range of individual and business taxpayers.
Among other key changes for individuals, the TCJA reduced tax rates, suspended personal exemptions, increased the standard deduction, and revamped the rules for itemized deductions. Generally, the provisions affecting individuals went into effect in 2018, but are scheduled to “sunset” after 2025. This provides a limited window of opportunity in some cases.
The impact on businesses was just as significant. For starters, the TCJA imposed a flat 21% tax rate on corporations, doubled the maximum Section 179 ‘expensing’ allowance, limited business interest deductions, and repealed write-offs for entertainment expenses. Unlike the changes for individuals, most of these provisions are permanent, but could be revised if Congress acts again.
This article will focus on business tax planning. Be aware that the concepts discussed in this article are intended to provide only a general overview of year-end tax planning. It is recommended that you review your personal situation with a tax professional.
Under the TCJA, a business may benefit from a combination of three depreciation-based tax breaks: (1) the Section 179 deduction, (2) ‘bonus’ depreciation, and (3) regular depreciation.
YEAR-END ACTION: Acquire property and make sure it is placed in service before the end of the year. Typically, a small business can then write off most, if not all, of the cost in 2019.
- Section 179 deductions: This tax-code section allows you to ‘expense’ (i.e., currently deduct) the cost of qualified property placed in service during the year. The maximum annual deduction is phased out on a dollar-for-dollar basis above a specified threshold.
The maximum Section 179 allowance has been raised gradually over the last decade, but the TCJA gave it a massive boost. In 2017, the deduction limit was $510,000, and the phase-out threshold was $2.03 million. Those figures rose to $1 million and $2.5 million in 2018, and $1.02 million and $2.55 million in 2019.
However, note that the Section 179 deduction cannot exceed the taxable income from all your business activities this year. This could limit your deduction for 2019.
- Bonus depreciation: The TCJA doubled the previous 50% first-year bonus depreciation deduction to 100% for property placed in service after Sept. 27, 2017. It also expanded the definition of qualified property to include used, not just new, property.
Note that the TCJA gradually phases out bonus depreciation after 2022. This tax break is scheduled to disappear completely after 2026.
- Regular depreciation: Finally, if there is any remaining acquisition cost, the balance may be deducted over time under the Modified Accelerated Cost Recovery System (MACRS).
TIP: A MACRS depreciation deduction may be reduced if the cost of business assets placed in service during the last quarter of 2019 (Oct. 1 through Dec. 31) exceeds 40% of the cost of all assets placed in service during the year (not counting real estate). Additionally, many states, including Massachusetts and Connecticut, do not recognize bonus depreciation. This should be included in your planning considerations.
Although the TCJA repealed the deduction for entertainment expenses beginning in 2018, you can still deduct expenses for travel and meal expenses while you are away from home on business and in other limited situations. The primary purpose of the expense must meet strict business-related rules.
If you travel by car, you may be able to deduct your actual expenses, including a depreciation allowance, or opt for the standard mileage deduction. The standard mileage rate for 2019 is 58 cents per business mile (plus tolls and parking fees). Annual depreciation deductions for ‘luxury cars’ are limited, but the TCJA generally enhanced those deductions for vehicles placed in service in 2018 and thereafter.
TIP: The IRS recently issued a ruling that explains when food and beverage costs are deductible when those costs are stated separately from entertainment on invoices or receipts.
The TCJA authorized a deduction of up to 20% of the ‘qualified business income’ (QBI) earned by a qualified taxpayer. This deduction may be claimed by owners of pass-through entities — partnerships, S corporations, and limited liability companies (LLCs) — as well as sole proprietors.
YEAR-END ACTION: The QBI deduction is reduced for some taxpayers based on the amount of their income. Depending on your situation, you may accelerate or defer income at the end of the year, according to the figures.
First, however, it must be determined if you are in a ‘specified service trade or business’ (SSTB). This includes most personal-service providers. Then three key rules apply:
- If you are a single filer with income in 2019 below $160,725 or a joint filer below $321,400, you are entitled to the full 20% deduction.
- If you are a single filer with income in 2019 above $210,700 or a joint filer above $421,400, your deduction is completely eliminated if you are in an SSTB. For non-SSTB taxpayers, the deduction is reduced, possibly down to zero.
- If your income falls between the thresholds stated above, your QBI deduction is reduced, regardless of whether you are in an SSTB or not.
TIP: Other rules and limits may apply, including new guidelines for real-estate activities. Consult with your tax advisor for more details about your situation.
While expenses for business repairs are currently deductible, the cost of improvements to business property must be written off over time. The IRS recently issued regulations that clarify the distinctions between repairs and improvements.
YEAR-END ACTION: When appropriate, complete minor repairs before the end of the year. The deductions can offset taxable business income in 2019.
Estimated Tax Payments
A corporation (other than a large corporation) that anticipates a small net operating loss for 2019 (and substantial net income in 2020) may find it worthwhile to accelerate just enough of its 2020 income (or to defer just enough of its 2019 deductions) to create a small amount of net income for 2019.
YEAR-END ACTION: This will permit the corporation to base its 2020 estimated tax installments on the relatively small amount of income shown on its 2019 return, rather than having to pay estimated taxes based on 100% of its much larger 2020 taxable income.
These are just some of the year-end steps that can be taken to save taxes. As previously mentioned, be aware that the concepts discussed in this article are intended to provide only a general overview of year-end tax planning. It is recommended that you review your personal situation with a tax professional.
Kristina Drzal-Houghton, CPA, MST is the partner in charge of Taxation at Holyoke-based Meyers Brothers Kalicka, P.C.; (413) 536-8510.