The “spooky season” (September, October) is the time you should be undertaking year-end tax planning. To avoid truly frightful tax ramifications, don’t wait until December to engage with accountants, like CPA, Stefanie Wientjes. “Waiting until December is a little late in the game to make meaningful changes, resulting in tax savings,” Wientjes said. As Wientjes’ client, even before you meet with her, she looks at prior-year tax returns and the current year-to-date income statement and balance sheet that applies to your business as a best practice. “I look for anomalies between the two years that may trigger the right questions,” she said. From there, Wientjes has a conversation with you: “What are you experiencing? What do you expect to experience in the current tax year?”
If you are too busy for tax planning now and need to wait till year’s end, Wientjes said she is looking for six key items. “The general ledger, year-end bank statements, details of certain expenses and deposits, payroll tax returns, fixed asset schedules and, in 2020, we have a new form 1099-NEC for payments made to independent contractors,” she said.
The Form 1099-NEC (Nonemployee Compensation) applies to business taxpayers who pay (or receive) independent contractor compensation. The Internal Revenue Service notes payers must complete the form to report any payment to a payee that exceeds $6oo. While there is an extension to file under “certain hardship conditions,” the IRS reports, generally, the form must be filed by January 31.
“When doing tax planning for the business, I am looking for a trial balance, income statement and balance sheet,” she added. “I want clients to tell me what has happened this year that is different than last year. I want to know what they anticipate the rest of the year to look like.” She continued: “Quite often we need the tax planning done on the business. So, we can determine how it will impact the individual. On the individual side, I will need the most recent pay stubs. I will need information on their investment accounts. Just like the business, I will want to know what has changed since the prior year.”
Demystifying, getting the most out of tax reform
She acknowledges that your business can “rock along” without tax planning. You just pay the tax you owe on the income that you earn. But, notably, Wientjes indicated tax planning is a vehicle for you to make better decisions about your business. As an owner, you can “structure major transactions in a tax-advantaged manner,” she said. And, you can ensure sufficient liquid cash is on hand to pay taxes that are on the horizon.
Wientjes recalled a small business that was considering buying a large piece of equipment as part of the Tax Cuts and Jobs Act (TCJA) reforms passed by Congress and signed into law December 2017, the Bonus Depreciation increased from 50% to 100%.
This tax incentive largely allows your business to immediately deduct a sizeable percentage price of eligible assets, like machinery, rather than to write them off over the “life” of said asset. “That sounds like a great deal,” Wientjes explained. “The small business purchases an asset – that meets certain requirements – and they get to deduct 100% of the cost of that asset in the current year.” In the aforementioned example, the bonus depreciation puts the business in a loss position. “They lose the ability to take the qualified business income (QBI) deduction of 20%,” she said. “And you fail to fully utilize the lower tax brackets of the individual on the personal return.” The afore-referenced QBI refers to a deduction available after December 31, 2017 for many sole proprietors, as well as the self-employed, partners (in partnerships), beneficial ownership of trusts, and S-Corp shareholders. By way of the IRS, QBI includes domestic income from a trade of business, excluding employee wages, capital gains, interest, and dividend income.
“Compound that,” Wientjes said, “with the next year there is no depreciation on the asset and now the income is taxed at higher rates, because you have fewer deductions to offset income.”
If you as a business owner elected out of bonus depreciation, Wientjes said, you might be able to reduce current-year income using Section 179 and regular depreciation to a level whereby the lower brackets – and the 20% QBI deduction – is maximized. Section 179 specifically refers to the “Expensing Depreciable Business Assets.” By way of IRS.gov, you could immediately expense more business assets after TCJA went into effect. A taxpayer, the service’s tax reform guide notes, can elect to expense the cost of any Section 179 property and deduct it the year the property is “placed in service.” With the TCJA, the maximum deduction increased from $500,000 to $1 million (adjusted for inflation beginning with taxable years after 2018).
TCJA further modified the definition of Section 179 property to include improvement on nonresidential real estate, such as a building’s interior, roofs, HVAC, and security and fire protection. Another key asset, passenger vehicles, was subject to new depreciation limits; if bonus depreciation isn’t claimed, the greatest allowed depreciation deduction starts at $10K for the first year and dips to $5,760 after the third year and any later taxable years in the recovery period. If bonus depreciation is claimed at 100%, the greatest allowable depreciation is $18K for the first year and otherwise matches the max allowed deduction for those who don’t claim bonus depreciation initially (i.e. $16K, $9,600 and $5,760 for subsequent years).
Speaking of your asset on wheels, whether you are buying or leasing a car for your business purposes, you can deduct related expenses using the standard mileage rate (or actual expenses). Aside from the obvious (fuel), applicable expenses span oil, insurance, garage rentals, parking fees, registration, repairs, and tires. If you own the vehicle, you can opt to switch to the actual expense method in a later year if that becomes more favorable than the standard mileage rate. Whereas, with leased vehicles, if you opt for standard mileage, that method must be used for the lifespan of the lease. Additionally, you may even deduct a portion of the interest on the car’s loan if you choose to buy. Same goes for any associated fees on a leased or rental vehicle used for business purposes.
Also, keep in mind that when you no longer need that vehicle for your business, you may be subject to a taxable gain or deductible loss based on whether you own the car or lease it. The depreciation-related portion of any gain isn’t taxed as ordinary income. This is all moot if you return a leased vehicle the dealer; there isn’t a taxable gain or loss.
Speaking of your asset within “four walls,” RE Journals, which serves the commercial real estate sector, spotlighted several tax advantages associated with buying such property, including the aforementioned depreciation and interest expense. As with other types of structures and assets, the commercial building depreciates as soon as it’s purchased. As the depreciation builds, it can offset your tax liability. Likewise, since the interest paid on the mortgage for your property is deductible, it can be accounted for as a deduction from the taxes that your business owes. Additional benefits to potentially consider include:
Post-sales tax savings; if property is left to beneficiaries, they’d pay tax only on the increase in value starting at the time of your death
Non-mortgage-related expenses that are also potential deductions (such as renovations, maintenance, upgrades)
Capital gains -- using real estate as a vehicle to use at retirement, the tax rate on capital gains for the purchase of these buildings is more favorable than the personal tax rate on most retirement investments, such as IRA funds.
Get tax relief, know the implications of pandemic programs
A number of pandemic-associated resources are available at the “Coronavirus Tax Relief” tab on the Internal Revenue Service’s home page. Businesses, individuals, and other organizations may be eligible for tax assistance. Plus, economic impact payment information, payment status tracking, and information on new COVID-19-related employer tax credits can all be found by navigating the information at this tab; for instance, a refundable credit of 50% (up to $10,000) in qualified wages paid to an employee from March 13 through the end of 2020 is available to those employers experiencing economic hardship due to the pandemic. You may also be eligible for paid sick leave and family leave credits.
However, when asked about the most prominent changes related to taxes at year-end that weren’t present in previous years, OFWF’s Wientjes referred to the Paycheck Protection Program (PPP) established by The Coronavirus Aid, Relief, and Economic Security (CARES) Act and implemented by the U.S. Small Business Administration with support from the U.S. Department of Treasury. A number of program rules are showcased at the Treasury site. The program has been a moving target, and each rule update is accompanied by the date it was posted. So, for the very latest, it’s best to check here or, ideally, to contact your tax preparer.
“Many small business’ have taken out Paycheck Protection Loans (PPP) or other forms of economic assistance to get them through the economic challenges due to COVID-19,” Wientjes said, and, as a business owner: “We will want to ensure they are capturing relevant data and submitting it to their banks in a timely manner to ensure maximum forgiveness of debt under the PPP program.” If you’ve taken advantage of the deferral of the employer’s portion of the Social Security tax liability, Wientjes noted, they as your accountant would verify you are aware of applicable due dates to remit deferred taxes.
Via an August 28 release on the IRS site, some employers may be able to defer withholding and payment of the employee’s portion of the SS tax if said employee’s taxable wages fall below $4,000 in a bi-weekly pay period. Relief is reportedly available for wages paid from September 1, 2020 to December 31, 2020.
Be it via meetings distanced virtually with Zoom, or in office with appropriate safety protocols in place, conversing early and often with your accountant has arguably never been more important than in this wild and woolly 2020.