9 Tips for Your Company’s Year-End Tax Planning– November 20, 2019 by Adam Fink

With the Tax Cuts and Jobs Act (TCJA) in full swing, and the release of many final regulations regarding TCJA provisions this past year, businesses can begin taking advantage of tax savings or tax deferrals with clearer guidance. The good news is there is still plenty of time until December 31 to work with your tax advisors to maximize your opportunities. Below we feature a few of the broader tax planning items to consider for your business. 

1. Entity Structure

One of the most frequently asked questions for companies after the TCJA still revolves around entity structure. Should a company elect to be taxed as a C Corporation? Here are a few reasons why some may consider a C Corporation a more favorable structure: 

  • New lower corporate tax rate of 21%
  • Owner fringe benefits
  • Repeal of alternative minimum tax (AMT)
  • Ability to choose any fiscal year
  • State taxes deductible without a limit
  • Less cumbersome compliance
  • No corporate income tax in some states, such as Ohio
  • Potential qualification of small business stock under Section 1202 

But careful analysis is critical before changing entity structure: 

  • Don’t forget the corporation double tax upon liquidation or asset sale still applies (federal double tax burden is 39.8%).
  • Take into consideration the personal income tax brackets. If you’re an owner in a pass-through entity, it’s conceivable that some of your pass-through income may not be taxed above 29.6% IF you are entitled to the qualified business income tax deduction. Other income would be subject to the standard personal tax rates.
  • Know the ramifications of revoking an S Corporation election. You will have to wait five years to re-elect the S Corporation status and then will be subject to built-in gains tax for another five years after re-electing. The decision could leave you with significant tax liability exposure.

2. Section 199A – Qualified Business Income Deduction (QBID)

This new deduction for business owners is a significant consideration when deciding on entity structure. Essentially, for tax years 2018 through 2025, owners (individuals, estates and trusts) of partnerships, S Corporations and sole proprietorships can take a maximum deduction of 20% of their qualified business income. However, wage limitations apply and specified service business owners are not eligible for the deduction if their taxable income is above a certain threshold.
To qualify without any limitations, individuals may need to consider reducing their taxable income so it falls under the $160,700 threshold ($321,400 married filing jointly). One way to accomplish this is to make contributions to retirement plans or health savings accounts or even through charitable contributions.  
Under the right circumstances, aggregating businesses may greatly increase the QBI deduction. There are specific requirements that may allow related businesses to aggregate, so be sure to discuss those with your advisors. 

3. Accounting Method Changes

Evaluate your current accounting method: cash or accrual. The TCJA raised the gross receipts limit for cash basis accounting from $5 million to $25 million based upon a three-year average. This opens the door for more businesses to use the cash method if desired, which generally gives taxpayers more control over their taxable income. For example, cash method taxpayers may find it much easier to shift income, such as by holding off billings until next year or accelerating expenses into this year, by paying bills early or making certain prepayments. Deciding on which accounting method to use is just as critical as which entity type you select.
Other accounting method change opportunities include accounting for inventory, advanced payments, UNICAP and revenue recognition.  
And be aware that some taxpayers may be “required” to change methods. Double check the rules for this area of taxation so you don’t find a surprise at filing time that could be addressed now. 

4. Bonus Depreciation/Section 179 Expensing

The TCJA increased the Section 179 expensing threshold to $1 million with a higher phase out amount, and increased bonus depreciation to 100% for property placed in service after September 27, 2017, and before January 1, 2023. Also, now taxpayers can write off not only brand-new fixed assets, but also assets that are “new-to-you,” a group that previously did not qualify. So you could receive the full 100% write off this year if you buy new or used assets before year-end and place them in service by December 31.
Also consider any qualified improvement property, which is now eligible for 179 expensing (up to the $1 million limit). This property is not technically eligible for bonus depreciation, and the IRS has not made the highly anticipated technical correction to the regulations to allow for accelerated deprecation for 39-year property. So taxpayers are still required to use longer depreciation lives if the property doesn’t qualify for Section 179.

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5. Meal and Entertainment Expenses

The guidance on meal and entertainment expenses allows a 50% deduction for meals in certain circumstances. We will recommend creating separate general ledger accounts to separately record all of your meal and entertainment expense-related items. This will assist your tax advisor in properly deducting these items and maximize the benefits.

6. Credits and Incentives

The R&D credit is a great opportunity for businesses that incur expenses to improve processes or develop new products. Note that after 2021, R&D expenses will need to be capitalized and amortized. Also, check to see if your state offers a state-level R&D credit for more savings. Other potentially helpful credits include the Work Opportunity Tax Credit, Small Business Health Care tax credit, New Markets Tax Credit, and a credit for smaller businesses related to starting new retirement plans for employees. As of the date of this blog post, two of these credits, the Work Opportunity Tax Credit and the New Markets Tax Credit, are set to expire at the end of 2019 and can make a big impact. Look for any opportunities now before they expire.
And don’t forget about the Qualified Opportunity Zone Program. This program offers taxpayers two primary benefits:  1) a temporary deferral of gains from gross income when those gains are from a sale or exchange and are reinvested in a qualified opportunity fund (QO Fund) after December 31, 2017; and 2) the opportunity to permanently exclude the appreciation on the original investment in the QO Fund if held in the QO Fund for at least 10 years.

7. International Provisions

The TCJA overhaul made very significant changes to the U.S. international tax regime, including introducing new provisions aimed at encouraging taxpayers to keep intangible value in the United States. Congress added the Sec. 250 foreign derived intangible deduction, which provides an incentive to domestic corporations in the form of a lower tax rate on income derived from tangible and intangible products and services in foreign markets. As a result, a corporation can claim a 37.5% deduction, which results in a permanent tax benefit and a 13.125% effective tax rate. This is compared to a 21% corporate rate, for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026, after which the deduction is reduced to 21.875%, resulting in an effective tax rate of 16.406%.
Congress also added provisions for the taxation of global intangible low-taxed income (GILTI). Specifically, Sec. 951A requires a 10% U.S. shareholder of a controlled foreign corporation (CFC) to include in current income the shareholder's share of the CFC's GILTI. The GILTI rules result in a U.S. tax on earnings that exceed a 10% routine return on certain foreign tangible assets. Eligible C Corporations that are U.S. shareholders may deduct 50% of any GILTI inclusion, reducing the effective rate on GILTI to 10.5%, before taking into account any eligible indirect foreign tax credit. For tax years after 2025, the deduction is reduced to 37.5%, resulting in an effective tax rate on GILTI of 13.125%. 

8. Partnership Provisions

IRS audit procedures introduced in the Bipartisan Budget Act of 2015 will hold certain partnerships responsible for paying any tax and related interest and penalties resulting from an IRS audit, beginning with the 2018 tax year. That means there is much to consider if you are a partnership. Consider your opt-out and push-out options and any necessary partnership agreement updates, including who you will select for a partnership representative. Keep in mind you must make any amendments to LLC agreements by March 15 of the following year. For example, if you make an amendment to the agreement that will be reflected on the 2019 tax return, it must be amended by March 15, 2020. 

9. The Wayfair Decision

The 2018 Wayfair Supreme Court decision gives states more control over requiring out-of-state businesses to collect sales tax — regardless if they have a physical presence in the state. That means changes for all types of sellers who have sales in locations throughout the U.S., not just retailers. Almost every state with a sales tax now has a statute in place to collect more sales tax. If your company has met certain thresholds this year in any of those states and are not collecting, you are already out of compliance and creating a liability.
But there are likely even tougher business decisions ahead. In addition to determining in which states you may have liability, a thorough review of your company’s current accounting system and staffing is necessary to determine whether the company can handle sales tax in multiple states and localities with the resources currently on hand in an accurate and timely fashion. Third party software to help maintain sales tax rates and even additional staff to handle monthly sales tax compliance may be necessary. There are also implications to mergers and acquisitions and even to the financial statements. Be sure to talk with your tax advisor regarding a couple potential areas of relief, namely exemption certificates and marketplace facilitators.

Regardless of your industry, company size or location, begin the planning process now with your tax advisors to help you reduce your liabilities for the 2019 tax year.
Contact Adam Fink at afink@cohencpa.com or a member of your service team to discuss this topic further. 

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.