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Year-End Tax Planning for Businesses

By: Tax Hotline
Fall 2020 (Vol. 38, No. 3)

Businesses can immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017, and before January 1, 2023.

The Section 179 deduction allows businesses to deduct immediately the entire cost of most new equipment up to a maximum of $1.04 million of the first $2.59 million of property placed in service by December 31, 2020. However, the Section 179 deduction cannot exceed net taxable business income. The deduction is phased out dollar for dollar on amounts exceeding the $2.59 million threshold and eliminated above amounts exceeding $3.63 million.

For property placed in service in taxable years beginning after December 31, 2017, taxpayers can also elect to include certain improvements including roofs, HVAC, fi re protection, alarm and security systems. You can also deduct improvements to a building’s interior except the enlargement of the building, any elevator or escalator or the internal structural framework of the building.

Real estate qualified improvement property is eligible for immediate expensing, thanks to the CARES Act, which corrected an error in the Tax Cuts and Jobs Act. Taxpayers are also able to amend 2018 tax returns, if necessary.

Many business taxpayers may be eligible for the Qualified Business Income Deduction. This deduction is worth up to 20 percent of qualified business income (QBI) from a qualified trade or business for tax years 2018 through 2025. Your taxable income must be under $163,300 ($326,600 for joint returns) in 2020 to take advantage of the deduction. The QBI is complex, and tax planning strategies can directly affect the amount of deduction, i.e., increase or reduce the dollar amount.

Small business employers with 25 or fewer full-time equivalent employees with average annual wages of $50,000 indexed for inflation (e.g., $55,000 in 2019) may qualify for the Small Business Health Care Tax Credit to help pay for employees’ health insurance. The credit is 50 percent (35 percent for non-profits).

Business energy investment tax credits are still available for eligible systems placed in service on or before December 31, 2022. Business energy credits include geothermal electric, large wind, solar and hybrid solar energy systems used to generate electricity, to heat, cool, or to provide hot water for use in a structure, or to provide solar process heat.

Where possible, end of year repairs and expenses should be deducted immediately, rather than depreciated. Small businesses lacking applicable financial statements can take advantage of de minimis safe harbor by electing to deduct smaller purchases ($2,500 or less per purchase or invoice). Businesses with applicable financial statements can deduct $5,000. Small businesses with gross receipts of $10 million or less can also take advantage of safe harbor for repairs, maintenance, and improvements to eligible buildings.

For luxury passenger vehicles placed in service after December 31, 2017, If the taxpayer doesn’t claim bonus depreciation, the maximum allowable depreciation deduction for 2020 is $10,100 for the first year. Deductions are based on a percentage of business use. For passenger autos eligible for the additional bonus first-year depreciation, the maximum first-year depreciation allowance remains at $8,000. It applies to new and used (“new to you”) vehicles acquired and placed in service after September 27, 2017 and remains in effect for tax years through December 31, 2022. When combined with the increased depreciation allowance above, the deduction amounts to as much as $18,100 in 2020.

Heavy vehicles including pickup trucks, vans, and SUVs whose gross vehicle weight rating (GVWR) is more than 6,000 pounds are treated as transportation equipment. As such, heavy vehicles (new or used) placed into service after September 27, 2017, and before January 1, 2023, qualify for a 100 percent first-year bonus depreciation deduction as well.

Self-employed individuals who have not yet done so should set up self-employed retirement plans before the end of 2020 and reduce accumulated corporate profits and earnings by issuing corporate dividends to shareholders.

Last chance to take advantage of the employer credit for paid family and medical leave, which expires at the end of 2020.