There are 27 Days Remaining in the Year. Tax Planning Can Make This Time Well “Spent”.
As the days get shorter and the nights longer, you realize it is almost the end of the year. The end of the year is a great time to do last minute tax planning to potentially maximize your deductions and minimize your 2019 tax liability.
With tax planning, the goal is always to minimize tax. One method to minimize tax, as a cash basis taxpayer, is to delay the receipt of income until the following year. In doing so, there are several items to consider: what is the tax rate next year as compared to this year, are there large equipment purchases to consider for next year that could possibly offset the additional income, or could the company reduce interest incurred on borrowed funds by using the tax savings as working capital now. Discuss these and other options with your tax professional in order to have a complete picture in which to make decisions regarding the deferral of income.
On the other side, let’s look at how expenses can affect year-end tax planning. If your company receives a bill in December for a $10,000 repair that will not be paid until 2020, you will not be able to deduct this on the 2019 tax return as a cash basis taxpayer. There are several items to consider before paying expenses to recognize the deduction in the current year. For example, using cash to pay down your accounts payable will affect your working capital ratio so work with your bank, bonding agent and tax professional to make sure you do not cause any issues.
One common question we receive is, "If I buy a new bulldozer, can I deduct it this year?" There are three main issues to consider when answering a question regarding a new asset purchase: how will writing off this $100,000+ asset affect your tax basis, how will it reduce your qualified business income deduction (20% deduction on taxable income), and how will it affect your future depreciation expenses. Let’s assume these three items are not issues for the 2019 tax year. What are the options for deducting this asset? There are two options: Section 179 and bonus depreciation.
- For 2019, the Section 179 limit is a maximum deduction of $1,000,000, which will start to phase out when total cost of current new assets exceeds $2,500,000. Let’s say the bulldozer is the only asset purchased in 2019. Since the new asset cost is $100,000, purchases are under the $1,000,000 maximum deduction limit and under the $2,500,000 phase out limit and able to fully deduct the asset. If there are multiple businesses owned, other considerations will affect the Section 179 deduction. Consult with your tax advisor before making any large purchases.
- For 2019, there is no limit on the deductible amount under bonus deprecation rules. There are, however, specific rules around which assets will qualify. For the Bulldozer example, this asset is a qualifying asset, which allows for a $100,000 depreciation deduction under bonus depreciation rules.
Use the following link to the IRS website for more detail on these two depreciation rules:
One last item to mention is retirement plans. Retirement plans are not a one-size fits all as there are a number of options: 401K, Simple IRA, Cash Balance Plans, Traditional IRA, and others. The team at EGP Wealth Management is available to take a comprehensive look at your company and present a plan that maximizes your needs and goals. EGP Wealth Management works hand-in-hand with the tax professionals at EGP PLLC to form a plan that not only maximizes your retirement goals but also minimizes any possible tax consequences along the way.
Tax law is lengthy and complex. There are a number of tax planning opportunities built into tax law, but someone on your team needs to know how to find the ones that apply to your specific tax situation. If your tax professional isn’t working diligently on your behalf, please do not hesitate to contact EGP PLLC.