Tag Archives: year-end-tax planning

Business year-end tax planning in a TCJA world

The first tax-filing season under the Tax Cuts and Jobs Act (TCJA) was a time of uncertainty for many businesses as they struggled with the implications of the law’s sweeping changes for their bottom lines. With the next filing season on the horizon, you can incorporate the lessons learned into your year-end tax planning. Several areas in particular are ripe with opportunities to reduce your 2019 federal tax liability.

Entity choice

The creation of the qualified business income (QBI) deduction for pass-through entities, paired with the reduction of the corporate tax rate to a flat 21% rate from a top rate of 35%, make it worthwhile to re-evaluate whether your current entity type is the most tax-favorable.

Pass-through entities, including sole proprietorships, partnerships and S corporations, traditionally have been seen as a way to avoid the double taxation C corporations are subject to at the entity and dividend levels. Pass-through entities are taxed only once, at an individual tax rate, but that rate can be as high as 37%. If they qualify for the full 20% QBI deduction — not always a sure thing (see below) — their effective tax rate is about 30%.

The deduction for state and local taxes also plays a role in the entity choice. The TCJA limits the amount of the deduction for individual pass-through entity owners, but not for corporations.

Bear in mind, too, that the reduced corporate tax rate is permanent (or as permanent as any tax cut can be), while the QBI deduction is slated to end after 2025. Ultimately, your business’s individual circumstances will determine the optimal structure.

The QBI deduction

Pass-through entities can take several steps before December 31 to maximize their QBI deduction. The deduction is subject to phased-in limitations based on W-2 wages paid (including many employee benefits), the unadjusted basis of qualified property and taxable income. You could boost your deduction, therefore, by increasing wages (for example, by hiring new employees, giving raises or making independent contractors employees). To increase your adjusted basis, you can invest in qualified property by year end.

If the W-2 wages limitation doesn’t limit the QBI deduction, S corporation owners can increase their QBI deductions by reducing the amount of wages the business pays them. (This tactic won’t work for sole proprietorships or partnerships, because they don’t pay their owners salaries.) On the other hand, if the W-2 wages limitation limits the deduction, they might be able to take a greater deduction by increasing their wages.

Tax credits

Some of the most popular tax credits for businesses survived the tax overhaul, including the Work Opportunity Tax Credit (WOTC), the Small Business Health Care tax credit, the New Markets Tax Credit (NMTC) and the research credit (also referred to as the “research and development,” “R&D” or “research and experimentation” credit). Smaller businesses may qualify for a credit for starting new retirement plans.

The WOTC, generally worth a maximum of $2,400 per employee (although for certain employees that can increase to $9,600), is currently scheduled to expire on December 31, so make those qualified hires before year end. The NMTC — 39% over seven years — also is set to expire at year end.

Capital asset investments

Purchasing equipment and other qualified capital assets has been a valuable tool for reducing taxable income for years, but the TCJA further greased the wheels by expanding bonus depreciation and Section 179 expensing (that is, deducting the entire cost in the current tax year).

For qualified property purchased after September 27, 2017, and before January 1, 2023, you can deduct the entire cost of new and used (subject to certain conditions) qualified property in the year the property is placed in service. Special rules apply to property with a longer production period.

Eligible property includes computer systems, computer software, vehicles, machinery, equipment and office furniture. Starting in 2023, the amount of the deduction will drop 20% each year going forward, disappearing altogether in 2027, absent congressional action.

Congress has thus far failed to take action to correct a drafting error in the TCJA that leaves qualified improvement property (generally interior improvements to nonresidential real property) ineligible for bonus deprecation.

Qualified improvement property is, however, eligible for Sec. 179 expensing. The TCJA makes this expensing available to several improvements to nonresidential real property, including roofs, HVAC, fire protection systems, alarm systems and security systems. It also increases the maximum deduction for qualifying property: For 2019, the limit is $1.02 million. (The maximum deduction is limited to the amount of income from business activity.) The expensing deduction begins phasing out on a dollar-for-dollar basis when qualifying property placed in service this year exceeds $2.55 million.

Deferring income / accelerating expenses

This technique has long been employed by businesses that don’t expect to be in a higher tax bracket the following year. If you use cash-basis accounting, for example, you might defer income into 2020 by sending your December invoices toward the end of the month. (Note that the TCJA now allows businesses with three-year average annual gross receipts of $25 million or less to use cash-basis accounting.) If your accounting is done on an accrual basis, you could delay delivery of goods and services until January.

Any business can accelerate deductible expenses into 2019 by putting them on a credit card in late December and paying it off in 2020 (subject to limitations). And cash-basis businesses can prepay bills due in January, as well as certain other expenses. Some caveats now apply to this approach. First, it could affect the amount of the QBI deduction for pass-through entities. It might make more sense to maximize the deduction while it’s still around — the deduction currently is scheduled to sunset after 2025 and, depending on the results of the 2020 elections, could be eliminated before then. Moreover, this tactic isn’t advisable if you’re likely to face higher tax rates in the future.

Act now

You still have time to make a significant dent in your business’s federal tax liability for 2019. We can help you chart the best course forward to minimize your tax bill and put you on solid ground for upcoming tax years.

© 2019

It’s not too late to trim your 2019 tax bill

Fall is in the air and that means it’s time to turn your attention to year-end tax planning. While several clear strategies and tactics emerged during the first tax filing season under the Tax Cuts and Jobs Act (TCJA), 2019 and subsequent years bring potential twists that must be considered, too. Let’s take a closer look at year-end tax planning strategies that can reduce your 2019 income tax liability.

Deferring income and accelerating expenses

Deferring income into the next tax year and accelerating expenses into the current tax year is a time-tested technique for taxpayers who don’t expect to be in a higher tax bracket the following year. Independent contractors and other self-employed individuals can, for example, hold off on sending invoices until late December to push the associated income into 2020. And all taxpayers, regardless of employment status, can defer income by taking capital gains after January 1. Be careful, though, because by waiting to sell you also risk the possibility that your investment might become less valuable.

Bear in mind, also, that there may be other reasons that taking the income this year can be more beneficial. For starters, future tax rates can go up. It’s possible that income tax rates might increase substantially by 2021, especially for those with higher incomes, depending on 2020 election results. In any event, in 2026, the higher tax rates that were in place for 2017 are scheduled to return.

Moreover, taxpayers who qualify for the qualified business income (QBI) deduction for pass-through entities (that is, sole proprietors, partnerships, limited liability companies and S corporations) could end up reducing the size of that deduction if they reduce their income. It might make more sense to maximize the QBI deduction — which is scheduled to end after 2025 — while it’s available.

Timing itemized deductions

The TCJA substantially boosted the standard deduction. For 2019, it’s $24,400 for married couples and $12,200 for single filers. With many of the previously popular itemized deductions eliminated or limited, some taxpayers can find it challenging to claim more in itemized deductions than the standard deduction. Timing, or “bunching,” those deductions may make it easier.

Bunching basically means delaying or accelerating deductions into a tax year to exceed the standard deduction and claim itemized deductions. You could, for example, bunch your charitable contributions if it means you can get a tax break for one tax year. If you normally make your donations at the end of the year, you can bunch donations in alternative years — say, donate in January and December of 2020 and January and December of 2022.

If you have a donor-advised fund (DAF), you can make multiple contributions to it in a single year, accelerating the deduction. You then decide when the funds are distributed to the charity. If, for instance, your objective is to give annually in equal increments, doing so will allow your chosen charities to receive a reliable stream of yearly donations (something that’s critical to their financial stability), and you can deduct the total amount in a single tax year.

If you donate appreciated assets that you’ve held for more than one year to a DAF or a nonprofit, you’ll avoid long-term capital gains taxes that you’d have to pay if you sold the property and (subject to certain restrictions) also obtain a deduction for the assets’ fair market value. This tactic pays off even more if you’re subject to the 3.8% net investment income tax or the top long-term capital gains tax rate (20% for 2019).

What if you’re looking to divest yourself of assets on which you have a loss? Rather than donate the asset, the better move from a tax perspective is more likely going to be to sell it to take advantage of the loss and then donate the proceeds.

Timing also comes into play with medical expenses. The TCJA lowered the threshold for deducting unreimbursed medical expenses to 7.5% of adjusted gross income (AGI) for 2017 and 2018, but it bounces back to 10% of AGI for 2019. Bunching qualified medical expenses into one year could make you eligible for the deduction.

You also could bunch property tax payments (assuming local law permits you to pay in advance). This approach might, however, bring your total state and local tax deduction over the $10,000 limit, which means that you’d effectively forfeit the deduction on the excess.

As with income deferral and expense acceleration, you need to consider your tax bracket status when timing deductions. Itemized deductions are worth more when you’re in a higher tax bracket. If you expect to land in a higher bracket in 2020, you’ll save more by timing your deductions for that year.

Loss harvesting against capital gains

2019 has been a turbulent year for some investments. Thus, your portfolio may be ripe for loss harvesting — that is, selling underperforming investments before year end to realize losses you can use to offset taxable gains you also realized this year, on a dollar-for-dollar basis. If your losses exceed your gains, you generally can apply up to $3,000 of the excess to offset ordinary income. Any unused losses, however, may be carried forward indefinitely throughout your lifetime, providing the opportunity for you to use the losses in a subsequent year.

Maximizing your retirement contributions

As always, individual taxpayers should consider making their maximum allowable contributions for the year to their IRAs, 401(k) plans, deferred annuities and other tax-advantaged retirement accounts. For 2019, you can contribute up to $19,000 to 401(k)s and $6,000 for IRAs. Those age 50 or older are eligible to make an additional catch-up contribution of $1,000 to an IRA and, so long as the plan allows, $6,000 for 401(k)s and other employer-sponsored plans.

Accounting for 2019 TCJA changes

Most — but not all — provisions of the TCJA took effect in 2018. The repeal of the individual mandate penalty for those without qualified health insurance, for example, isn’t effective until this year. In addition, the TCJA eliminates the deduction for alimony payments for couples divorced in 2019 or later, and alimony recipients are no longer required to include the payments in their taxable income.

Act now

The future of tax planning is uncertain — even without dramatic change in Washington, D.C., many of the most significant TCJA provisions are set to expire within six years. Contact us for help with your year-end tax planning.

© 2019

2018 Cost-of-Living Adjustments

The IRS recently issued its 2018 cost-of-living adjustments. In a nutshell, to account for inflation, many amounts increased, but some stayed at 2017 levels. As you implement 2017 year-end tax planning strategies, be sure to take these 2018 adjustments into account in your planning. (However, keep in mind that, if Congress passes a new tax law, some of these amounts may change.)

Gift and estate taxes

The annual gift tax exclusion increases for the first time since 2013 to $15,000 (up from $14,000 for 2017). It’s adjusted only in $1,000 increments, so it typically increases only every few years.

The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2018 the amount is $5.60 million (up from $5.49 million for 2017).

Individual income taxes

Tax-bracket thresholds increase for each filing status but, because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket increases by $200 to $400, depending on filing status, but the top of the 35% bracket increases by $4,675 to $9,350, again depending on filing status.


The personal and dependency exemption increases by $100, to $4,150 for 2018. The exemption is subject to a phaseout, which reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer’s adjusted gross income (AGI) exceeds the applicable threshold (2% of each $1,250 for separate filers).

For 2018, the phaseout starting points increase by $3,100 to $6,200, to AGI of $266,700 (singles), $293,350 (heads of households), $320,000 (joint filers), and $160,000 (separate filers). The exemption phases out completely at $389,200 (singles), $415,850 (heads of households), $442,500 (joint filers), and $221,250 (separate filers).

Your AGI also may affect some of your itemized deductions. An AGI-based limit reduces certain otherwise allowable deductions by 3% of the amount by which a taxpayer’s AGI exceeds the applicable threshold (not to exceed 80% of otherwise allowable deductions). The thresholds are the same as for the personal and dependency exemption phaseout.

AMT

The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.

Like the regular tax brackets, the AMT brackets are annually indexed for inflation. For 2018, the threshold for the 28% bracket increased by $3,700 for all filing statuses except married filing separately, which increased by half that amount.

The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2018 are $55,400 for singles and heads of households and $86,200 for joint filers, increasing by $1,100 and $1,700, respectively, over 2017 amounts. The inflation-adjusted phaseout ranges for 2018 are $123,100–$344,700 (singles and heads of households) and $164,100–$508,900 (joint filers). Amounts for separate filers are half of those for joint filers.

Education- and child-related breaks

The maximum benefits of various education- and child-related breaks generally remain the same for 2018. But most of these breaks are limited based on the taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within the applicable phaseout range are eligible for a partial break — breaks are eliminated for those whose MAGIs exceed the top of the range.

The MAGI phaseout ranges generally remain the same or increase modestly for 2018, depending on the break. For example:

The American Opportunity credit. The MAGI phaseout ranges for this education credit (maximum $2,500 per eligible student) remain the same for 2018: $160,000–$180,000 for joint filers and $80,000–$90,000 for other filers.

The Lifetime Learning credit. The MAGI phaseout ranges for this education credit (maximum $2,000 per tax return) increase for 2018; they’re $114,000–$134,000 for joint filers and $57,000–$67,000 for other filers — up $2,000 for joint filers and $1,000 for others.

The adoption credit. The MAGI phaseout ranges for this credit also increase for 2018 — by $4,040, to $207,580–$247,580 for joint, head-of-household and single filers. The maximum credit increases by $270, to $13,840 for 2018.

(Note: Married couples filing separately generally aren’t eligible for these credits.)

These are only some of the education- and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible.

Retirement plans

Not all of the retirement-plan-related limits increase for 2018. Thus, you may have limited opportunities to increase your retirement savings if you’ve already been contributing the maximum amount allowed:

Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2018:

Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if the taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:

  • For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
    • For a spouse who participates, the 2018 phaseout range limits increase by  $2,000, to $101,000–$121,000.
    • For a spouse who doesn’t participate, the 2018 phaseout range limits increase by $3,000, to $189,000–$199,000.
  • For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2018 phaseout range limits increase by $1,000, to $63,000–$73,000.

Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $5,500 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.

Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

  • For married taxpayers filing jointly, the 2018 phaseout range limits increase by $3,000, to $189,000–$199,000.
  • For single and head-of-household taxpayers, the 2018 phaseout range limits increase by $2,000, to $120,000–$135,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

Impact on your year-end tax planning and retirement planning

The 2018 cost-of-living adjustment amounts are trending higher than 2017 amounts. How might these amounts affect your year-end tax planning or retirement planning? Contact us for answers. We’d be pleased to help.