Business Owners: Year-End Tax Planning Strategies
Several end-of-year tax planning strategies are available to business owners to reduce their tax liability:
Businesses using the cash method of accounting can defer income into 2022 by delaying end-of-year invoices so that payment is not received until 2023. Businesses using the accrual method can defer income by postponing the delivery of goods or services until January 2022.
Bonus Depreciation. Businesses are allowed to immediately deduct 100% of the cost of eligible property such as machinery and equipment that is placed in service after September 27, 2017, and before January 1, 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.
The first-year 100% bonus depreciation deduction is available for qualifying assets even if they are placed in service for only a few days in 2021.
Section 179 Expensing. Businesses should take advantage of Section 179 expensing this year whenever possible. In 2021, businesses can elect to expense (deduct immediately) the entire cost of most new equipment up to a maximum of $1.05 million of the first $2.62 million of property placed in service by December 31, 2021. Keep in mind that the Section 179 deduction cannot exceed net taxable business income. The deduction is phased out dollar for dollar on amounts exceeding the $2.62 million threshold and eliminated above amounts exceeding $3.67 million.
Computer or peripheral equipment placed in service after December 31, 2017, are not included in listed property.
Qualified Property. Qualified property is defined as property that you placed in service during the tax year and used predominantly (more than 50 percent) in your trade or business. Property placed in service and then disposed of in that same tax year does not qualify, nor does property converted to personal use in the same tax year it is acquired.
Taxpayers can also elect to include certain improvements made to nonresidential real property after the date of when the property was first placed in service.
1. Qualified improvement property refers to any improvement to a building’s interior; however, improvements do not qualify if they are attributable to:
2. Roofs, HVAC, fire protection systems, alarm systems, and security systems.
These changes apply to property placed in service in taxable years beginning after December 31, 2017.
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.
Qualified Business Income Deduction. Many business taxpayers – including owners of businesses operated through sole proprietorships, partnerships, and S corporations, as well as trusts and estates, may be eligible for the qualified business income. 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 $164,900 for single and head of household filers and $329,800 for married taxpayers filing joint returns to take advantage of the deduction in 2021.
Small Business Health Care Tax Credit. Small business employers with 25 or fewer full-time-equivalent employees with average annual wages of $50,000 indexed for inflation (e.g., $56,000 in 2020) may qualify for a tax credit to help pay for employees’ health insurance. The credit is 50 percent (35 percent for non-profits).
Business Energy Investment Tax Credit (ITC). Business energy investment tax credits are still available, and businesses that want to take advantage of these tax credits can still do so. Business energy credits include geothermal electric, large wind (expires at the end of 2021), and solar energy systems used to generate electricity, heat, cool, or provide hot water for use in a structure, or to provide solar process heat. There is also a 30 percent tax credit for offshore wind facilities in inland or coastal waters if construction begins before 2026. Hybrid solar lighting systems, which use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, are also eligible; excluded, however, are passive solar and solar pool heating systems. Utilities are allowed to use the credits as well.
Repair Regulations. Where possible, end-of-year repairs and expenses should be deducted immediately, rather than capitalized and depreciated. Small businesses lacking applicable financial statements (AFS) 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.
Depreciation Limitations on Luxury, Passenger Automobiles, and Heavy Vehicles. As a reminder, tax reform changed depreciation limits 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 2021 is $10,200 for the first year.
Deductions are based on a percentage of business use. A business owner whose business use of the vehicle is 100 percent can take a larger deduction than one whose business use of a car is only 50 percent.
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 $18,200 in 2021.
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 instead of passenger vehicles. 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.
Retirement Plans. Self-employed individuals who have not yet done so should set up self-employed retirement plans before the end of the year.
Paid Family and Medical Leave Credit. A business tax credit is available for employers providing paid family and medical leave to qualifying employees through 2025. Employers must have a written policy in place that meets certain requirements and meet other conditions. The credit, set to expire in 2020, was extended through 2025. It ranges from 12.5% to 25% of wages paid to qualifying employees for up to 12 weeks of family and medical leave per taxable year.
Work Opportunity Tax Credit (WOTC). Extended through 2025 (The Consolidated Appropriations Act, 2021), the Work Opportunity Tax Credit is available for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) and is generally equal to 40 percent of the first $6,000 of wages paid to a new hire.
>The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.