As 2019 winds down, your company might be ramping up for your holiday party or scurrying through the last odds and ends in anticipation of some time off toward the end of the month. The end of the year is a great time to stop and assess your business benchmarks and adjust your business plan for the next year. It’s also the optimal time to take care of your year-end tax planning.
As a business owner, getting a head start on this will help you assess where you are and what changes you need to make for the coming year. The Tax Cuts and Jobs Act (TCJA) brought massive changes to the bottom line for companies of all sizes. As you’ve already gone through your first filing under the TCJA, now is the time to take advantage of all the lessons you’ve learned for this year’s filing and your plans surrounding tax benefits for 2020.
The Changes Made Under TCJA and How They Impact Businesses
In a nutshell, the TCJA offered a wealth of tax breaks for businesses of every size. For corporations, it reduced the tax rate from 35% to 21% while increasing the bonus depreciation rate from 50% to 100%. One thing to be aware of here is that the TCJA does not limit the deductions for corporations, but it does limit the number of deductions for pass-through entities, such as sole proprietorships, S Corps, or LLCs.
Traditionally, the business structure choice was largely made based on the type of business, state, and local taxes, and the fact that pass-through business structures were only taxed once. Other factors in the TCJA impact your choice of business structure, such as the Qualified Business Income (QBI) deductions that are allowed for pass-through entities. You should keep in mind though that the changes made for corporate taxes are permanent, where the individual and pass-through entity regulations have an expiration date.
Whatever the size of your company, there are some critical things for you to look at as you do your year-end tax planning, as well as budgetary plans that will be impacted by your 2020 taxes.
Are You Using the Best Business Structure?
The Tax Cuts and Jobs Act was such a large bill with so many implications that many businesses tried to make their current structure fit into the new laws with the best advantages possible. Now, it’s time to think proactively about using these regulations to your advantage and look for ways to decrease your tax liability and increase tax savings.
That doesn’t necessarily mean that you should change structures. The advantages will still affect the decision on the type of structure your business currently is in versus the benefits of using a different structure. Pass-through business entities may be paying a higher tax percentage than C Corps, though they also can qualify for Qualified Business Income deductions, which may offset the difference. Another thing to keep in mind here is the fact that deductions are limited for businesses that are not corporations, which may impact your bottom line.
Accelerating expenses has been a great technique for businesses that use cash basis accounting, and it’s still usable under the TCJA. If you have expenses that you know you’ll need to invest in through the coming year, you can go ahead and make those purchases or pay those bills in advance before the end of December.
This allows you to add those expenses to 2019’s tax cycle. This is something to keep in mind because some of these deductions are not permanent changes, which means that they may not be available in the coming years.
Some companies will add these charges to an open line of credit to achieve the same goal. Still, there are limits to this approach, and you need to be meticulous in the bookkeeping if you’re paying the balance in 2020 so you don’t accidentally try to deduct the same expenditure in subsequent years.
One of the marks of TCJA is that it sets out to simplify the rules for businesses under a certain threshold of profits. You’re now allowed to deduct 100% of bonus depreciation for qualified new investments.
Previously it was only 50%. However, these deductions are scheduled to go down in increments with the deduction eliminated by 2026. So it would benefit companies to plan ahead and get these investments in before the deductions are diminished or gone, providing the tax laws don’t change in the meantime.
Currently, under TCJA, your business can deduct 30% of the income before amortization, interest, and depreciation. The adjustments for amortization and depreciation are set to expire, but there are no limitations for businesses under a certain threshold of income.
There is now an 80% limit on net operating loss. Before the TCJA, businesses could claim up to 100% net operating loss on taxable income, and they were able to carry back losses for up to two years. That’s changed.
Now you have a limit of 80%, and there is no longer the option to carry back losses to previous years. However, you can still carry forward losses to future years, and there is no limit on that option. Before the TCJA, there was a 20-year limit on carry-forward losses.
The TCJA simplified some accounting processes for businesses, but it also added a lot of changes that take some planning to take advantage of fully. That’s why it’s ideal if you look forward to fully use all of the deductions and benefits of this law before they expire. Year-end tax planning isn’t just about meeting the regulatory requirements. It should be about positioning your company for the best fiscal advantages moving into the new tax year.