It’s that time of year again! Time to execute on planning opportunities these final weeks of the year to minimize your business’s tax liabilities.
We are closing in on the end of 2019, year two, under The Tax Cuts and Jobs Act. Time to execute on planning opportunities these final weeks of the year to minimize your business’s tax liabilities.
Tax Due Dates
We encourage business clients to close their books as soon as possible after December 31, 2019. This enables the business to provide financial information to their L&B professional in a
timely manner, keeping the following due dates in mind:
- Due March 16, 2020
- Partnerships – filing calendar year Form 1065
- S corporations – filing calendar year Form 1120S
- Due April 15, 2020
- C corporations – filing calendar year Form 1120
- Single Member LLCs, Sole Proprietorships – filing Form 1040 Sch C, Sch E, or Sch F
C corporations: For 2019 and 2020 tax years, the tax rate remains a flat 21%.
Partnerships, S-Corporations, LLCs, Sole Proprietorships: “Pass-through” entities are taxed at individual rates. While the tax rates are not changing from 2019 to 2020—the top rate remains 37%—the income brackets are increased for inflation. 2019 & 2020 tax tables can be found here.
Year-End Tax Planning Strategies
Below are excellent tax strategies designed especially for businesses that report tax on cash basis and anticipate being subject to the same tax rate or lower in 2020.
- Defer taxable income to 2020 by sending customer invoices in January instead of December.
- To accelerate deductions, make December purchases by credit card. This allows for a 2019 tax deduction even when you pay the credit card company in 2020.
- Purchase fixed assets eligible for 100% immediate deduction by December 31st. See our article here to learn how businesses can take advantage of bonus depreciation, Section 179 asset expensing, and de minimis safe harbor strategies.
- Pay 2019 bonuses before year-end.
- Prepay expenses. For example, consider paying a portion of next year’s insurance coverage before year-end. Note that the tax rules on deducting prepayments can be complex, so please call your L&B professional to discuss.
- Mail checks to vendors by December 31st. If your A/P department has scheduled check disbursements for early January, consider a December mailing to obtain 2019 tax deductions.
- 20% Qualified Business Income (QBI) deduction strategies. See our article here for further discussion.
- Increase 2019 wages/bonuses or fixed asset purchases to increase the QBI deduction limit.
- Specified service businesses whose owners are at or around the QBI taxable income thresholds can increase retirement plan contributions to lower income below the thresholds to allow the deduction.
- For partnerships that report significant guaranteed payments, review your partnership agreement to determine if guaranteed payment allocations can be reduced, as they are ineligible for the QBI deduction. Income thresholds still apply when considering the possible deduction when the income can be moved away from a guaranteed payment.
- For businesses with average gross receipts under $25 million, consider the following accounting method changes:
- Use the cash method of accounting for tax purposes instead of accrual. This creates an advantage when your receivables outweigh payables.
- For inventory accounting, change from uniform capitalization (“UNICAP”) to a simplified or more tax-favorable inventory method.
- For long-term construction contracts using the percentage-of-completion method of accounting, consider changing to another method such as completed-contract.
- Establish a tax-advantaged retirement plan for your business in time to make 2019 deductible contributions. 401(k)’s and defined benefit plans generally must be established by December 31. SEP IRAs must be established by the tax return due date including extensions. Employee deferrals into these plans will be required by December 31st but employer match contributions are allowed until the due date of the return including extensions in most cases.
Strategies may be different for accrual basis taxpayers or businesses anticipating a higher tax rate in 2020. Before implementing any tax strategy, please ensure that it makes business sense independent of the tax outcome.
To discuss these or any other year-end tax planning strategies with an L&B professional, please give us a call at (858) 558-9200.