Small Business planning tips for you!

If you own a small business, consider the following strategies to minimize your tax bill for 2020.

Net Operating Losses (NOLs).

The CARES Act relaxed many NOL limitations that were implemented under the Tax Cuts and Jobs Act. If your business expects a loss in 2020, you can carry back that loss to the prior five tax years.

Establish a Tax-favored Retirement Plan.

If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions. If you’re employed by your own corporation, 25% of your salary can be contributed with a maximum contribution of $57,000.

Other small business retirement plan options include the 401(k) plan, the defined benefit pension plan, and the SIMPLE-IRA. So, depending on your circumstances, these other types of plans may allow bigger deductible contributions.

Contact us for information on small business retirement plan alternatives. Be aware that if your business has employees, you may have to cover them too.

Take advantage of generous depreciation tax breaks for small business.

The CARES Act made a technical correction to the TCJA that retroactively treats a wide variety of interior, non-load-bearing building improvements [known as Qualified Improvement Property (QIP)] as eligible for bonus deprecation (and hence a 100% write-off). If you elect out of bonus depreciation, you can depreciate QIP over 15 years. Businesses can take advantage of this provision by filing for a change in accounting method. They can also do this by amending the applicable return. Contact us for more details.

Claim 100% Bonus Depreciation for Heavy SUVs, Pickups, or Vans. This can have a beneficial impact on first-year deductions for new and used heavy vehicles used over 50% for business. However, it is only available when the vehicle has a manufacturer’s Gross Vehicle Weight Rating above 6,000 pounds. The GVWR of a vehicle can be verified by looking at the manufacturer’s label.

Take advantage of your small business’s vehicles!

Claim First-year Depreciation Deductions for Cars, Light Trucks, and Light Vans. Luxury auto depreciation limits are as follows:

  • $18,100 for Year 1 if bonus depreciation is claimed.
  • $16,100 for Year 2.
  • $9,700 for Year 3.
  • $5,760 for Year 4 and thereafter until the vehicle is fully depreciated.

Note that the $18,100 first-year luxury auto depreciation limit only applies to vehicles that cost $58,500 or more. So, vehicles that cost less are depreciated over six tax years using percentages based on their cost. Contact us for details.

Cash in on Generous Section 179 Deduction Rules.

For qualifying property placed in service in tax years beginning in 2020, the maximum Section 179 deduction is $1.04 million. So, the Section 179 deduction phase-out threshold amount is $2.59 million.

Time small business income and deductions for tax savings.

Conducting business using a pass-through entity? Your shares of the business’s income and deductions are taxed at your personal rates. Assume next year’s individual federal income tax brackets will be the same as this year’s. In turn, you could expect to be in the same bracket next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2020 until 2021.

However, it’s quite likely that 2020 was a comparatively bad year thanks to COVID-19. Hopefully, you expect to be in a higher tax bracket in 2021. If so, take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2021. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate. Contact us for more information on timing strategies.

Watch out for Small Business Interest Expense Limit.

The CARES Act temporarily relaxed the unfavorable TCJA limitation on a taxpayer’s deduction for business interest expense. The deduction is limited to the sum of :

  1. Business interest income
  2. 30% of adjusted taxable income
  3. Floor plan financing interest paid by certain vehicle dealers.

Many businesses are exempt from the interest expense limit rules under the small business exception. Taxpayers are exempt from the limit if average annual gross receipts are $26 million or less for the three-tax-year period.

The CARES Act also allows businesses to elect to use their 2019 adjusted taxable income in calculating their 2020 limitation. If annual receipts are over the threshold, year-end tax planning may allow your business to qualify for an exception. We can help with that.

Reach out to MKA if you have any questions.