Year-End Tax Planning Opportunities for Your Business

This blog post was previously published on November 28, 2018. It was updated on November 18, 2019.

Over the past couple of years, there have been several changes to the tax landscape impacting businesses of all sizes. Business leaders having tax planning discussions with their advisors this year should consider not only the continued implications of the Tax Cuts and Jobs Act, but also other developments, such as the new revenue recognition standard, which could affect their tax bill.

Understand tax impact of new revenue recognition standard

If you have a Generally Accepted Accounting Principles (GAAP) annual report you may need to use the new revenue recognition standard ASC 606, which also has tax implications.

By now, private companies should have addressed the requirements of the Accounting Standards Codification Section 606, which went into effect for most non-public companies for annual reporting periods beginning after December 15, 2018. If you don’t adopt the rules in ASC 606, you will not be in compliance with GAAP.

Addressing ASC 606 can be complex and time-consuming for many companies, and certainly requires a lot of planning. You may need to file a change in accounting method to conform to the GAAP change, as maintaining two sets of records to preserve a previous method of accounting may be too costly.

ASC 606 also has tax implications, and may accelerate the reclamation of revenue, and, therefore, accelerate the income tax due for 2019. Speak with your tax advisor to learn more about the new revenue recognition standard, what your company needs to do to comply by the deadline, and how it may affect your 2019 taxes.

Evaluate your capital strategy

Companies whose capital strategy is largely reliant on borrowing may see negative effects (i.e., increased cost of borrowing) from tax changes related to interest expense deductibility.

For net interest expense that exceeds 30% of adjusted taxable income, deductibility is now limited. A phase-in through 2021 means adjusted tax income is computed without accounting for depreciation, amortization or depletion; however, beginning in 2022 those items will be included in the calculation.

Planning should include consideration of refinancing debt, repaying debt sooner, and other capital strategies.

Decide whether to acquire assets that you can depreciate this year

Starting in 2018, bonus depreciation, a method of accelerated depreciation that allows you to take an additional deduction the first year you own qualified property, became more expansive. For property acquired after September 27, 2017, and through the end of 2022, 100% of the basis can be depreciated in the first year, and the property only has to be “new to the taxpayer,” meaning used property can qualify.

When making decisions about bonus depreciation, also take into account any net operating losses (NOLs), and how the ability to deduct them may be affected. Current tax laws only allow the use of NOLs to offset up to 80% of a business’s taxable income. If you have a NOL, it may not make sense to acquire an asset this year.

It is important to note that some states have decoupled and disallowed this bonus depreciation, so you will need to consider whether your state is following federal or state tax laws as it relates to bonus depreciation when filing your 2019 tax return.

Year-end planning should include assessing any property purchased during the year. Speak with your tax advisor about whether it makes sense to accelerate purchases to this year.

Don’t overlook R&D tax credit; you might qualify

Are you doing research and development? You may qualify for the R&D tax credit, even if you’re not sure you do. Several years ago, the credit was expanded to cover process development and experimentation, in addition to new product development.

The Tax Cuts and Jobs Act, which went into effect for tax year 2018, also indirectly increased the R&D tax credit’s after-tax benefit when it reduced the corporate tax rate to 21%. Additionally, the tax law’s removal of the corporate alternative minimum tax (AMT) gave more companies the opportunity to take advantage of the R&D tax credit.

The Tax Cuts and Jobs Act also limited the deductibility of net operating losses generated after December 31, 2017. Businesses can offset up to 80% of their taxable income using net operating losses occurring after 2017. Companies expecting substantial revenue growth may consider taking advantage of their R&D tax credit now and applying it against the balance of taxable income that cannot be offset by their net operating losses.

Finally, keep in mind that, for taxable years beginning after Dec. 31, 2021, taxpayers will be required to capitalize and amortize research or experimental expenditures (which will include software development costs) over a period of five years. Those costs are currently immediately deductible as expenses.

If you’re involved in activities that you think might be covered, you should consult a tax advisor with experience in claiming and documenting the R&D tax credit to learn more about the tax savings opportunities that may be available.

Maximize your deduction for qualified business income (QBI)

Owners of certain pass-through entities may be able to receive a 20% deduction on QBI, which may reduce their maximum effective tax rate for 2019. Pass-through entities, which include subchapter S corporations, partnerships and some limited liability companies. There’s another plus for pass-throughs: they keep the deduction on entity-level state and local taxes.  

The deduction may be limited to 50% of W-2 wages paid, or the sum of 25% of the wages plus 2.5% of certain depreciable basis. Speak with your tax advisor about whether you have paid enough wages to use this deduction – if you’re close, now may be the time to pay bonus wages to employees.

Also, be aware that filers who claim the QBI deduction for 2019 will need to complete and submit to the IRS a new worksheet showing how they calculated QBI. Form 8995 – which is still in draft, includes a flowchart for calculating restrictions and limitations on each business that creates QBI. Each business must stand separately, and will require its own Form 8995.

The QBI deduction limitations and restrictions are set at the owner level. Planning for year-end 2019 should include discussion of salaries, timing and distribution of income.

Reporting requirements continue to grow

Schedule K-1 is one of several forms that will require more information for 2019 tax reporting. This is a good time to touch base with your tax professional to get an idea of new information you may need to prepare. It’s also a good time to check whether you have current, signed, valid W8s and W9s from all partners, investors or lenders.

Contact your Kaufman Rossin tax advisor to learn more about what you can do now to minimize your 2019 tax bill and prepare for 2020.