For many business owners, thoughts turn to taxes during the fourth quarter. Unlike last year, when the new tax laws were uncharted waters, you have the advantage of a longer planning horizon. Here are some new or updated tax provisions that may yield significant savings.
• 20% Qualified Business Income (QBI) Deduction: Sole proprietors, LLC members, partners and S-corporation shareholders may be entitled to deduct up to 20% of their business income. The deduction is taken on the 1040 individual tax return.
This year's deduction, however, may be limited or eliminated if taxable income exceeds $321,400 for a married couple filing jointly, $160,700 for singles and heads of household, and $160,725 for married people filing separately. To qualify under those thresholds (or be subject to a smaller phaseout of the deduction), business owners may achieve significant savings by deferring income or accelerating deductions. Depending on the form of your business entity, you may be able to maximize the new deduction by increasing employee W-2 wages before year-end, decreasing owner wages or modifying any "guaranteed payment" terms in a partnership agreement. The rules for this QBI deduction are quite complex but can provide substantial tax saving opportunities.
• Accounting method: Generally, it's favorable for a business to file taxes on a "cash basis" versus the "accrual basis." Under the cash basis, income actually collected in the current year is taxed. The accrual method includes income earned, whether or not it is collected. Under the new tax laws, more businesses can use the cash basis method of accounting than were allowed before.
To be eligible as a business for the cash basis accounting method, a taxpayer must, among other things, satisfy a gross receipts test. For 2019, the gross receipts test is satisfied if, during a three-year testing period, average annual gross receipts don't exceed $26 million. That's up from $25 million for 2018, and prior to that it was $5 million -- a significant change to the tax laws. Cash method taxpayers may find it much easier to shift income by holding off billings until next year, paying their bills early or by making certain prepayments.
• Expensing business property: The Tax Cuts and Jobs Act greatly enhanced prior limits on the decision to expense business property, known as the "Section 179 deduction." For tax years beginning in 2019, the expensing limit is $1,020,000 for a business that bought and began using (not merely purchased) business property valued at less than $2,550,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. The ability to expense property is also available for any improvement to a building's interior and for roofs, HVAC, fire protection, alarm and security systems.
Since the expensing deduction may be claimed in full regardless of how long the property is held during the year, it can be a potent tool for year-end tax planning. Property acquired and used in the last days of 2019, rather than at the beginning of 2020, can result in a full expensing deduction for 2019.
• 100% write-off of equipment: Businesses also can claim a 100% bonus first-year depreciation deduction for the purchase of new or used machinery or equipment if purchased and used this year. This is useful if the business doesn't qualify for the Section 179 expensing mentioned above.
These are just some highlights of how the new tax laws might help you as you look toward the end of 2019. As with most of the Internal Revenue Code, these new provisions are detailed and complex. You'll want to work with a qualified tax advisor in order to plan any steps that will save you and your company money.
• Ron Austin, CPA, MAS, is managing partner at Mathieson, Moyski, Austin & Co., LLP, a full-service accounting firm based in Wheaton. He can be reached at firstname.lastname@example.org.