You continue to have time to considerably cut back this yr’s enterprise earnings tax invoice. Listed below are seven yearend strikes to contemplate. However you’ll have to act quick.
Because of the Tax Cuts and Jobs Act (TCJA), 100% first-year bonus depreciation is obtainable for certified new and used property that’s acquired and positioned in service (put into enterprise use) in calendar yr 2020. Meaning your small business would possibly be capable to write off your entire value of some or your entire 2020 asset additions on this yr’s federal earnings tax return and perhaps on the state return too.
So, think about making extra acquisitions between now and December 31. Contact your tax professional for particulars on the 100% bonus depreciation break and precisely what sorts of property qualify. Hurry!
2. Declare 100% first-year bonus depreciation for late-breaking actual property certified enchancment property (QIP) expenditures
The 100% first-year bonus depreciation break can be accessible for industrial actual property certified enchancment property (QIP) that’s positioned in service this yr. QIP is outlined as an enchancment to an inside portion of a non-residential constructing that’s put in after the date the constructing was positioned in service. Nevertheless, QIP doesn’t embrace expenditures: (1) to enlarge a constructing, (2) for any elevator or escalator, or (3) for any inside structural framework of a constructing.
3. Write off new heavy SUV, pickup, or van
The 100% bonus depreciation provision can have a massively useful affect on first-year depreciation deductions for brand new and used heavy autos used over 50% for enterprise. That’s as a result of heavy SUVs, pickups, and vans are handled for federal earnings tax functions as transportation gear. In flip, which means they qualify for 100% bonus depreciation.
Particularly, 100% bonus depreciation is obtainable when the SUV, pickup, or van has a producer’s gross automobile weight score (GVWR) above 6,000 kilos. You possibly can confirm a automobile’s GVWR by wanting on the producer’s label, which is often discovered on the within fringe of the motive force’s aspect door the place the door hinges meet the body. If you’re contemplating shopping for an eligible automobile, doing so and putting it in service earlier than yearend may ship a juicy write-off on this yr’s return. Hurry!
4. Reap the benefits of more-generous first-year Part 179 deduction guidelines
For qualifying property positioned in service in tax years starting in 2020, the TCJA elevated the utmost first-year Part 179 deduction to a whopping $1.04 million (up from $510,000 for tax years starting in 2017). Two different useful adjustments had been made by the TCJA, they usually can doubtlessly decrease your 2020 tax invoice.
* The TCJA permits Part 179 deductions for private property utilized in reference to furnishing lodging. Examples of such property apparently embrace furnishings, kitchen home equipment, garden mowers, and different gear used within the dwelling quarters of a lodging facility or in reference to a lodging facility resembling a resort, motel, house home, rental rental, or rental single-family residence.
* The TCJA expanded the definition of actual property eligible for the Part 179 deduction to incorporate expenditures for roofs, HVAC gear, fireplace safety and alarm techniques, and safety techniques for nonresidential actual property. To qualify, this stuff have to be positioned in service after the nonresidential constructing was positioned in service.
Warning: Numerous limitations can apply to Part 179 deductions, particularly in case you conduct your small business as a partnership, LLC handled as a partnership for tax functions, or S company. Seek the advice of your tax professional to verify your small business collects the anticipated tax financial savings from the Part 179 deduction privilege.
5. Micromanage enterprise earnings and deductions for tax financial savings
If you happen to conduct your small business utilizing a pass-through entity — which means a sole proprietorship, S company, LLC, or partnership — your shares of the enterprise’s earnings and deductions are handed by means of to you and taxed at your private charges. For causes explained here, I count on subsequent yr’s particular person federal earnings tax charge brackets would be the identical as this yr’s, with modest bumps for inflation.
Assuming I’m proper, the normal technique of deferring taxable earnings into subsequent yr whereas accelerating deductible expenditures into this yr is sensible in case you count on to be in the identical or decrease tax bracket subsequent yr. Deferring earnings and accelerating deductions will, at a minimal, postpone a part of your tax invoice from 2020 till 2021. See the SIDEBAR for tactics to defer earnings.
Alternatively, in case you count on to be in a better tax bracket in 2021, since you hope and belief that it is going to be a a lot better yr, take the alternative strategy. Speed up earnings into this yr (if potential) and postpone deductible expenditures till 2021. That approach, extra earnings can be taxed at this yr’s decrease charge as a substitute of subsequent yr’s larger charge.
Key level: I count on the present 21% company federal earnings tax charge to stay in place for subsequent yr. Assuming I’m proper, deferring company taxable earnings into subsequent yr will turn into a great transfer.
6. Maximize deduction for pass-through enterprise earnings
The deduction based mostly on a person’s certified enterprise earnings (QBI) from pass-through entities was a key factor of the TCJA. For tax years starting in 2018-2025, the deduction may be as much as 20% of a pass-through entity proprietor’s QBI, topic to restrictions that may apply at larger earnings ranges and one other restriction based mostly on the proprietor’s taxable earnings.
For QBI deduction functions, pass-through entities are outlined as sole proprietorships, single-member LLCs which might be handled as sole proprietorships for tax functions, partnerships, LLCs which might be handled as partnerships for tax functions, and S firms.
The QBI deduction can be claimed for as much as 20% of earnings from certified REIT dividends and 20% of certified earnings from publicly-traded partnerships (PTPs). So the deduction can doubtlessly be an enormous tax saver.
Due to the constraints on the QBI deduction, tax planning strikes (or non-moves) can unexpectedly enhance or lower your allowable QBI deduction. For instance, strikes that cut back this yr’s taxable earnings can have the adverse aspect impact of decreasing your QBI deduction. So if you’re one who can profit from the deduction, work together with your tax professional to optimize your outcomes on this yr’s return.
7. Set up a tax-favored retirement plan
If your small business doesn’t have already got a retirement plan, now is likely to be the time to make the leap. Present retirement plan guidelines enable for vital deductible contributions. For instance, if you’re self-employed and arrange a SEP-IRA, you’ll be able to contribute as much as 20% of your self-employment earnings, with a most contribution of $57,000 for 2020. If you’re employed by your individual company, as much as 25% of your wage may be contributed to your account, with a most contribution of $57,000.
Different small enterprise retirement plan choices embrace the 401(ok) plan which might even be arrange for only one particular person (a sole-called solo 401(ok)), the outlined profit pension plan, and the SIMPLE-IRA. Relying in your circumstances, these different sorts of plans might enable larger deductible contributions.
The deadline for organising a SEP-IRA for a sole proprietorship enterprise and making the preliminary deductible contribution for the 2020 tax yr is October 15, 2021 in case you prolong your 2020 return to that date. Different sorts of plans typically have to be established by December 31 if you wish to make a deductible contribution for this yr. So hurry! The deadline for the contribution itself is the prolonged due date to your 2020 return.
Nevertheless, to make a SIMPLE-IRA contribution to your 2020 tax yr, you could have arrange the plan by October 1. So, you may need to attend till subsequent yr if the SIMPLE-IRA possibility is interesting.
Contact your tax professional for extra info on small enterprise retirement plan options, and bear in mind that if your small business has staff, you could have to cowl them too.
The final phrase
There you have got it: some comparatively easy and simple methods to decrease your 2020 enterprise tax invoice.
SIDEBAR: Methods to Defer Taxable Revenue
Most small companies are allowed to make use of cash-method accounting for tax functions. Assuming your small business is eligible, cash-method accounting lets you micro-manage your 2020 and 2021 enterprise taxable earnings to be able to reduce taxes over the two-year interval. If you happen to count on your small business earnings can be taxed on the identical or decrease charge subsequent yr, listed below are particular cash-method strikes to defer some taxable earnings till 2021.
* Cost recurring bills that you’d usually pay early subsequent yr on bank cards. You possibly can declare 2020 deductions although the bank card payments gained’t really be paid till 2021.
* Pay bills with checks and mail them a couple of days earlier than yearend. The tax guidelines say you’ll be able to deduct the bills within the yr you mail the checks, although they gained’t be cashed or deposited till early subsequent yr. For giant-ticket bills, think about sending checks through registered or licensed mail, so you’ll be able to show they had been mailed this yr.
* Earlier than yearend, prepay some bills. So long as the financial profit from the prepayment doesn’t prolong past the sooner of: (1) 12 months after the primary date on which your small business realizes the advantage of the expenditure or (2) the top of the subsequent tax yr. For instance, this rule lets you declare 2020 deductions for prepaying the primary three months of subsequent yr’s workplace hire or prepaying the premium for property insurance coverage protection for the primary half of subsequent yr.
* On the earnings aspect, the overall rule for cash-basis companies is that you simply don’t need to report earnings till the yr you obtain money or checks in hand or by means of the mail. To reap the benefits of this rule, think about ready till close to yearend to ship out some invoices to prospects. That can defer some earnings till 2021, since you gained’t accumulate the cash till early subsequent yr. For sure, this concept ought to solely be used for purchasers with stable fee histories.