When it comes to business tax planning in 2020, it's impossible to ignore the future tax increases under the Biden Tax Plan. The timing of the rollout, however, is anyone's guess. Nonetheless, you cannot allow yourself to be paralyzed into inaction, as there are strategies you can deploy that will allow you to hedge your bets. We present some of these strategies below.
UNDERSTAND THE BENEFITS PROVIDED UNDER THE NEW STIMULUS PACKAGE THAT WAS JUST PASSED BY CONGRESS. There are many items that will impact your business tax planning in the new stimulus bill and you’d be wise to watch our video explaining them here.
Push income forward into 2020, defer expenses to 2021. This would be true for both passthrough entities (LLCs, S Corporations) and C Corporations. If Biden’s tax plan is implemented in 2021, passthrough entities would lose the benefit of the 20% Qualified Business Income Deduction (QBID) if their personal taxable income exceeded $400K. Thus, they may as well maximize the 20% deduction by increasing their 2020 income, so long as it doesn’t subject them to a partial or total phaseout (if they are a Specified Service Trade of Business) and they have sufficient W-2 wages and/or capital assets to provide for the deduction (if they are a qualified business). For C Corporations, the top tax bracket would increase from 21% to 28% under Biden’s tax plan.
Ensure your business has paid sufficient wages to maximize the 20% QBID. This one is mostly about how much you are paying yourself as an owner but could also influence how much you wanted to bonus your employees. There is balance between paying too high of W-2 wages (since they are subject to payroll taxes and that income does NOT qualify for the QBID) and too low (since you limit your QBID). So, you need to work with an accountant to dial-in your companies’ W-2 wages to make sure you’re striking the right balance to get the best of both worlds.
Pay for your employees’ education expenses. Section 127 provides an interesting business tax planning opportunity for an employer to pay up to $5,250 of educational assistance to an employee on a tax-free basis (to the employee) while being able to deduct it on the business side. For 2020 only, this payment can be for principal and interest on the employees student loans. And as most of us know, most owners are employees of their companies.
Pay for your employees’ disaster relief expenses. Section 139 allows an employer to pay for employees’ expenses incurred as a result of a qualified disaster that are not reimbursed by insurance. There is no cap on the amount of this reimbursement. The COVID pandemic is a qualified disaster. The expenses must be reasonable and necessary considering the challenges posed by the disaster, and could include medical expenses, other health-related expenses, funeral expenses, childcare, tutoring expenses and increased telecommuting costs. Once again, these expenses are not taxable to the employee and are deductible by the company.
For businesses that had ample taxable income in prior years, consider accelerating expenses and deferring income. I know this is the opposite of the second business tax planning strategy listed in this guide, but if a business needs cash, a viable option could be to create a tax loss in 2020 (by shifting that income to 2021) in order to create a Net Operating Loss. Because of the CARES Act, this loss can be carried back (by noncorporate taxpayers) up to 5 years to offset income and generate a tax refund.
Buy equipment on credit. This one is always the most obvious, low-hanging fruit out there but this time it has a different wrinkle. By buying it on credit (with low interest rates), you’re keeping cash in the business. You’ll have the assistance of hindsight to be able to determine whether you should 100% bonus depreciate the entire asset in 2020 or depreciate it evenly over the life of the asset (you would want to buy a vehicle greater than 6,000 lbs if you want this flexibility, since vehicles below this weight are not eligible for 100% bonus depreciation). The benefit here is that you’ll have a better idea of where taxes are headed by the point you need to make this decision in 2021. If taxes don’t seem to be going up soon (possibly due to Republican control of the Senate), then you could 100% bonus depreciate that equipment to eliminate some or all of the taxable income that you pushed into 2020 as part of your business tax planning strategy in anticipation of higher taxes in subsequent years.
Wait until you file your tax return to make employer contributions to retirement accounts. The reasoning here is exactly the same as purchasing equipment. You buy yourself valuable time to determine whether and how much of a deduction to take for 2020 based on a better picture of the future.
Be extra charitable this year. C Corporations can deduct charitable contributions up to 25% of their modified taxable income in 2020, whereas the previous limitation was 10%. Once again, the CARES Act is to thank for this one.
S Corporations: make Section 1368 Election to spend Earnings & Profits in 2020. This business tax planning strategy is probably a bit more obscure, but basically the idea is that if an S Corporation was formerly a C Corporation, it should consider making an election to purge its accumulated Earnings and Profits while a C Corp in order to avoid the higher dividends rates being proposed under the Biden tax plan, which could be as high as 39.6%. Or, it may make sense if the shareholder has an expiring NOL or looking to avoid the tax on excess net passive income. A business could even make an election to have “deemed dividend” if no cash is available to distribute.
Elect to use 2019 adjusted taxable income (ATI) for purposes of the business interest expense deduction. Under the CARES Act, a business is now allowed to deduct interest expense up to 50% of ATI for 2019 and 2020. For tax year 2020, a businesses (except for partnerships, sorry) could use their 2019 ATI for purposes of the 2020 deduction if they make an election to do so. Any unused interest expense deduction carries forward indefinitely.
Consider onshoring certain operations. Biden’s tax plan calls for a 10% Offshoring Penalty surtax on profits from any goods or services that are created or delivered overseas and sold back to the U.S. On the other side of the coin, a 10% advanceable tax credit will be available to companies making investments that will create jobs for Americans. These investments would include revitalizing or expanding existing facilities, retooling existing facilities to advance manufacturing competitiveness, expanding manufacturing payroll, and expenses incurred in bringing jobs back from overseas. Essentially, most expenditures related to bringing jobs back to America, especially when it comes to manufacturing would be eligible.
Reconsider their method of accounting for C Corporations. One of the more unconventional proposals in Biden’s tax plan is to impose a minimum tax on corporations for businesses with financial statement net income in excess of $100 million to pay the greater of their regular corporate income tax or a 15% tax on their financial statement net income. The method of accounting used by the company for their financial statements could cause their net income to be higher than an alternative method of accounting. So, if it came to it, the company might want to move from the cash basis to the accrual basis, as such a change wouldn’t need prior approval by the IRS.
There are many other moves that can be made other than those above, but are often too nuanced or taxpayer-specific to merit discussion herein. We’re here to help you make the tax saving moves that make the most sense for you and your business.
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