As 2019 is wrapping up, it’s time to start thinking about a new year for your business. From a financial perspective, it’s important to start the year putting in place best practices to lower your tax liability and set up your business for a successful year. Below are a few tips that can make your life easier when tax time comes around.
TAKE ADVANTAGE OF THE QBI DEDUCTION
The Tax Cuts and Jobs Act introduced a new deduction called the Qualified Business Income (QBI) deduction for sole proprietors, LLCs, partnerships, S-corps, estates, and trusts. It allows business owners to exclude up to 20 percent of their qualified business income from federal income tax, whether they itemize or not.
The 20 percent QBI deduction is fairly straightforward for taxpayers with taxable income below $315,000; the deduction is a flat 20 percent of flow-through income not to exceed 20 percent of taxable income. W hen a taxpayer’s taxable income exceeds $315,000, the 20 percent QBI deduction is limited by the greater of 50 percent of allocable W-2 wages or 25 percent of allocable wages plus 2.5 percent of the unadjusted basis of income-producing assets (UBI A). For small businesses, there’s generally not a whole lot of UBI A planning that can be done to substantially increase the QBI deduction, but we have seen significantly more planning opportunities as it relates to increasing the wage base.
AGGREGATE BUSINESS ACTIVITIES TO GET THE MOST OF THE QBI DEDUCTION
Business owners can significantly increase their QBI deduction by ‘aggregating’ the activity of interrelated, commonly owned businesses. Aggregation allows profitable businesses with little or no wages or depreciable assets that would otherwise not be eligible for a QBI deduction to utilize wages and depreciable assets of a related business to achieve the maximum 20 percent QBI deduction.
LEGISLATION STILL PENDING ON QUALIFIED IMPROVEMENT PROPERTY (QIP)
The Tax Cuts and Jobs Act simplified and consolidated the various leasehold categories to one Qualified Improvement Property (QIP). Due to a legislative omission, QIP was not added to the list of property with a 15-year depreciation period and is not eligible for bonus depreciation. Corrective legislation is in the works to fix this and treat QIP with a 15-year depreciation period rather than a 39-year depreciation period and be eligible for bonus depreciation. If corrected, lessees and building owners who improve qualifying business property will gain federal tax benefits of shorter depreciable lives, increased bonus depreciation deductions and Section 179 expensing.
QIP has been further simplified to apply to interior common areas of nonresidential buildings if the improvement is placed in service after the building was first placed in service, can be owner occupied, and will not be subject to the three-year rule.
PLAN AHEAD FOR 100 PERCENT BONUS DEPRECIATION THROUGH 2022
Qualified property acquired and placed in service after September 27, 2017 is eligible for 100 percent bonus depreciation, and applies to both new and used qualified property.
Planning ahead to fully understand the potential tax impact of bonus depreciation is extremely important. After 2022, the amount of allowable bonus depreciation is then phased down over four years: 80 percent will be allowed for property placed in service in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026.
KEEP IN MIND SECTION 179 DEPRECIATION CAPPED AT $1 MILLION AGAIN IN 2019
An alternative to bonus depreciation is Section 179 expensing. The Tax Cuts and Jobs Act increased the expensing limit to $1 million, with a spending cap of $2.5 million of equipment purchases. The definition of qualified real property eligible for Section 179 expensing now includes roofs, HVAC equipment, fire protection, alarm systems, and security systems for nonresidential buildings.
Taking advantage of these tips now can help your company reap the tax benefits at the end of the year.
Robert L. Berger, CPA/CGMA is a partner in Tax Services at Anders CPAs + Advisors. He works with closely held business owners on individual and corporate tax consulting and retirement planning, and is the firm’s Director of the Real Estate and Construction Group. He can be reached at firstname.lastname@example.org.