Year-end Planning Moves for Small Businesses

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

  • Net Operating Losses (NOLs). The CARES Act temporarily relaxed many of the NOL limitations that were implemented under the Tax Cuts and Jobs Act (TCJA). If your small business expects a loss in 2020, know that you will be able to carry back 100% of that loss to the prior five tax years. If you had an NOL carried into 2020, you can claim a deduction equal to 100% of your 2020 taxable income.
  • 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 and credits. Contact us for more information on small business retirement plan alternatives, and be aware that if your business has employees, you may have to cover them too.
  • Take Advantage of Generous Depreciation Tax Breaks. 100% first-year bonus depreciation is available for qualified new and used property that is acquired and placed in service in calendar-year 2020. That means your business might be able to write off the entire cost of some or all of your 2020 asset additions on this year’s return. Thanks to the CARES Act, Qualified Improvement Property (QIP) is now eligible for bonus depreciation (or can be depreciated over 15 years rather than 39 years). So, consider making additional acquisitions, including QIP acquisitions, between now and year-end.
  • 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. The Section 179 deduction phase-out threshold amount is $2.59 million.
  • Time Business Income and Deductions for Tax Savings. If your business is conducted via a pass-through entity, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. On the other hand, if you expect to be in a higher tax bracket in 2021 (which could be the case due to COVID-19 and/or the results of the presidential election), take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2021.
  • Watch out for Business Interest Expense Limit. The CARES Act temporarily relaxed the unfavorable TCJA limitation on a taxpayer’s deduction for business interest expense. Under the TCJA, the deduction was limited to the sum of (1) business interest income, (2) 30% of adjusted taxable income, and (3) floor plan financing interest paid by certain vehicle dealers. For 2020, the 30% limit has been increased to 50% of adjusted taxable income. Barring additional legislation, the limit will go back to 30% in 2021. Fortunately, many businesses are exempt from this limit. We can help you determine if an exemption applies.

Reach out to MKA if you have any questions.

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