December 6, 2019
By Matthew Diment
With the end of the year quickly approaching, now is the time for any last minute planning to reduce taxable income for the year and to plan for 2019 and 2020 taxes. It is also a good time to revisit the changes from the 2017 tax legislation and what impact those changes continue to have.
Businesses that are operating as C-Corporations continue to benefit from the reduction in tax rates to 21% (federal) and the elimination of AMT tax. Remember though, if you a generating a loss in the current year, congress did away with the NOL carryback and only a carryforward is available.
For flow through type entities, such as S-Corporations and Partnerships, any qualified trade or business income is allowed up to a 20% deduction at the owner level. Certain service type businesses may be subject to additional limitations or not be eligible for the deduction. There are some limitations on the amount eligible for this qualified business income (QBI) deduction based on W-2 wages and qualifying depreciable property that may apply. Keep in mind that there are also aggregation rules for related entities with common ownership. For example, real estate may be held in a separate entity that rents to the operating business. This real estate activity will generally have no W-2 wages associated with it, so that would suggest that QBI could be limited. If you elect to aggregate these entities for QBI purposes, you may be able to utilize excess W-2 wages from the operating entity to eliminate any limitation in the related entities.
If you are looking to purchase any new equipment soon and also need to reduce taxable income for the year, purchasing and getting equipment in service before year end will likely provide a tax benefit. 100% bonus depreciation is still available and can be taken on both new and used equipment. One blunder of the tax legislation that has yet to be fixed is related to qualified improvement property, essentially improvements to the interior of a building. This property was intended to be 15 year property, eligible for bonus depreciation. Through a mistake in the drafting of the legislation, it is 39 year property and not eligible for bonus. Correction to the legislation has been pending for over a year, with no anticipated date in sight.
With the increase in the standard deduction starting in 2018 and the limitations on the state tax and former 2% deductions, fewer people are itemizing, which may serve to disincentivize year end charitable contributions. If you are required to take RMDs from your IRA, consider having some or all of that paid to a qualified 501(C)(3) organization rather than making the donation yourself as you will not be taxed on that portion. If you are not itemizing on your personal return, you will still get a benefit from your donation.
With applicable federal rates (AFR) still very low, it is a good time to review any inter-company or related party loans. The AFR is the minimum interest rate to be charged on these types of loans. If the current AFR is lower than what you are using for these types of loans right now, a refinance might make sense.
Remember to discuss any year end planning moves with your tax professional to understand all of the implications for your specific tax picture.