Business Tax Planning in 2020
In this difficult year, many businesses have faced a variety of challenges and tough choices. That’s why it’s important to understand what your options are for minimizing your tax obligation or potentially earning your business a small refund. The CARES Act also gives businesses a few new options for deductions, so now is the time to consider all your options for your 2020 tax return.
Filing deadlines are returning to their original timetables next year, as well – with corporate returns due March 15 – so it’s more important than ever to have your books organized and ready for Weiss professionals to begin their work as soon as possible.
Here’s a quick list of items for businesses to consider:
Home office deduction
Due to the COVID-19 pandemic, many small business owners and self-employed workers found themselves working from home this year. We expect many of them will be able to take advantage of the home office deduction in 2020. If eligible, these small businesses owners can use this deduction to help offset some home expenses, like mortgage or rent.
Deferring income and accelerating expenses
Deferring income into the next tax year and accelerating expenses into the current one constitute a time-tested and proven planning technique for taxpayers who do not 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 2021. And all taxpayers, regardless of employment status, can defer income by taking capital gains after the New Year.
Keep in mind that there also may be good reasons to take income this year instead of deferring. For example, it is possible that income tax rates might increase substantially in 2021, especially for those with higher incomes. Moreover, the higher tax rates that were in place for 2017 are scheduled to return in 2026.
Another example: 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 while it is still available.
Bunching medical and charitable deductions
The Tax Cuts and Jobs Act of 2017 substantially boosted the standard deduction. For 2020, it is $24,800 for married couples and $12,400 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. For example, you could bunch your charitable contributions, if it means you 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; for example, donate in January and December of 2021, then in January and December of 2023.
If you have a donor-advised fund (DAF), you can make multiple contributions to it in a single year, thereby accelerating the deduction. You then decide when the funds are distributed to the charity. If your objective is to give annually in equal increments, doing so will allow your chosen charities to receive a reliable stream of yearly donations – which is critical to their financial stability – while you deduct the total amount in a single tax year.
If you donate appreciated assets that you have held for more than one year to a DAF or a not-for-profit organization, you will avoid long-term capital gains taxes that you would have to pay if you sold the property, and also (subject to certain restrictions) obtain a deduction for the assets’ fair market value. This tactic pays off even more if you are subject to the 3.8% net investment income tax or the top long-term capital gains tax rate (20% for 2020).
What if you are 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 to sell it to take advantage of the loss, then donate the proceeds.
Timing also comes into play with medical expenses. The threshold for deducting unreimbursed medical expenses is 7.5% of adjusted gross income AGI for 2020. Bunching qualified medical expenses into one year could make you eligible for the deduction.
Offsetting capital losses against capital gains
2020 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 annual contributions to their IRAs, 401(k) plans, deferred annuities, and other tax-advantaged retirement accounts. For 2020, you can contribute up to $19,500 to 401(k)s and $6,000 to 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, $6,500 for 401(k)s and other employer-sponsored plans.
Claim 100% first-year bonus depreciation
Did your business buy new or used equipment this year and place it into service? You could receive a federal tax deduction of up to $1.04 million thanks to the new 100% first-year bonus depreciation deduction in the CARES Act. Businesses can also take the deduction on certain kinds of new and used equipment bought and placed into service after Sept. 27, 2017. These deductions are meant for small businesses and phase out at spending amounts starting at $2.59 million and ending above $3.63 million.
Make the most of this year’s losses
Many small businesses found themselves facing net operating losses this year. But under the CARES Act, certain businesses can apply a net operating loss generated in 2018, 2019 or 2020 to income from the past five years for a potential immediate refund. Because of this option, it may even be beneficial to incur even more expenses in 2020. Businesses have the option of amending past returns or carrying the losses forward. We are happy to help you figure out which move makes the most sense for your business.
Get organized and get your books in order
Though filing deadlines were pushed back this year, they will return to their original timetables in the spring. That means corporate returns must be filed by March 15, and individual returns by April 15. When you consider the ongoing uncertainty of the pandemic and related challenges – communicating and working on a virtual basis for example – that’s all the more reason to get all of your tax-related information into us as early as possible.
The time to act is now
It’s been a tough year on many fronts, but the CARES Act provided some silver linings for businesses. We know these new rules can be confusing, so we recommend businesses start to consider all of their 2020 tax options now. Contact your Weiss tax professional for help with your year-end tax planning today.
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