Year End Planning for Businesses

December 10, 2019

Along with the holidays and winter-themed cups at your favorite coffee shop, year-end tax planning season has arrived. There is still time to take action to manage your business income tax liability for 2019.  The following are ideas and opportunities to save tax dollars and help your company get ahead for 2019 tax returns.

Search the Balance Sheet for Deductions

The first place to look for deductions is capitalized costs on the balance sheet. The Tax Cuts and Jobs Act (“TCJA”) increased bonus depreciation deduction to 100% for both new and used equipment. The §179 expensing deduction is increased to $1,020,000 for 2019 and can also apply to roofs, HVAC, and qualified improvement property in certain buildings. The tangible property regulations issued in 2014 provide methods for deducting repairs and maintenance, partial dispositions, and de minimis expensing of small purchases.

In addition, deductions may be claimed for inventory items that may be obsolete or unsaleable and bad debts that are uncollectible. Other accruals and reserves may be deducted when the company makes an actual payment on these liabilities before year end.

Consider Accounting Methods and the Income Statement

TCJA expanded the companies that can use four simplified accounting methods. Companies with less than $26 million in average annual gross receipts over the last three years can use the cash method, can simplify inventory accounting, can pass on capitalizing costs under §263A, and, for contractors, can choose the completed contract method.

For companies using the accrual method of accounting, the Internal Revenue Service has recently issued proposed regulations for §451(b) and §451(c) to address the timing of recognizing income and deferring advance payments. For companies that adopted changes to their books and records under ASC 606, revenue recognition, these changes must also be evaluated for impact to tax reporting.

These last weeks of the year are a good time to evaluate the company expenses that may be limited by TCJA provisions such as interest expense and employee parking and entertainment. There may be steps to take now that can improve the outcome and allow a greater deduction.

Claim Tax Credits and Special Deductions

Although we are still waiting for final regulations regarding qualified opportunity zones, businesses and individuals can defer recognition of gain and potentially reduce gain up to 15% when gain proceeds are invested in qualified opportunity zone funds. It is still important that the opportunity zone investment makes good economic sense, but the tax savings from reinvesting gains can be significant.

Research and development tax credit, energy tax credits and certain employment tax credits remain relevant for 2019. Without an additional extension the Work Opportunity Tax Credit expires at the end of 2019.

The §199A qualified business income deduction is a valuable deduction for pass-through business owners. Companies can take steps to make sure the owners are able to maximize this deduction with proper planning for wages, for types of business activities, for proper allocation of expenses between businesses or to make changes to activities to qualify as a trade or business.

Other Business Tax Developments

State and Local Tax.  States continue their drive to implement economic nexus for sales and use tax in the wake of the U.S. Supreme Court decision in Wayfair. Approximately 45 states have enacted legislation that applies economic nexus laws.  Many of the states are following the thresholds from the Wayfair decision: $100,000 in sales or 200 transactions.   These law changes will complicate the assessment, collection and reporting for sales tax – whether the company is a vendor or a customer.

Also, with respect to income tax, Hawaii is the first state to enact legislation to set economic nexus thresholds for assessing income tax. This law takes effect in 2020 and uses a familiar threshold of $100,000 or 200 transactions. While Hawaii may be the first with economic nexus, over 30 states are implementing “market based sourcing” to determine how revenues are assigned to their state.  We strongly encourage all companies operating in multiple states to consider a nexus review and analysis to determine exposure for reporting income taxes.

International Operations.  TCJA brought dramatic changes to how US companies are taxed on worldwide activities.  The structure of business entities conducting business in the U.S. and outside of the U.S. can have a significant impact on overall tax costs.  In general, the new tax regime (e.g. GILTI, FDII and foreign tax credits) favors U.S.-based corporations over pass-through entities.  The IRS recently issued rules for taxing cloud based activity.  The location of intellectual property and related leasing arrangements can have an impact.  Effective tax planning for international activities begins with a thorough understanding of the company’s current organization of business entities and a good understanding of the company’s transfer pricing policies for transactions between these entities.

Partnerships: Basis and Audits.   As year two under the centralized partnership audit regime closes, we are addressing new challenges for correcting or changing filed returns.  We also see some companies that have not yet updated their partnership agreements to properly address the role of the partnership representative or other elements of the new rules.

What began as a last minute addition to 2018 partnership Schedules K-1 appears to now be the only method for reporting partners’ basis in 2019.  For 2018 partnership returns, taxpayers were required to provide a schedule of tax capital accounts if a partner’s tax capital account was negative at the start or end of the year. The 2019 draft version of Form 1065 Schedule K-1 indicates that all partnerships must report the partner’s capital account on a tax basis.  For taxpayers that were using GAAP or another method, this change will require a catch up analysis to correctly report the tax basis for 2019 returns.

This year, more than ever, we need to look beyond the traditional approach of “defer revenue and accelerate expenses.”  The discussion above highlights only a few options for year-end planning.  Each business will have a unique set of options and ideas that can work to reduce its 2019 tax liability.  We appreciate the opportunity to consult with you on year-end planning for your business. If you have questions or concerns, contact your trusted Cherry Bekaert professional.