Many Atlanta companies often take time at year-end to review activities and determine if there are tax planning opportunities they can leverage. While there are some “tried and true” methods that businesses have considered at year-end, there are now also important opportunities ushered in by the Tax Cuts and Jobs Act of 2017 (tax reform). Although the law has been in place for 2 years, many business owners are not familiar with the various savings opportunities that exist for their business. As the closing weeks of 2019 unfold ahead, it’s important for Atlanta companies to conduct a complete review of their activities to ensure they are capturing every opportunity possible. To help clients, prospects and others, Windham Brannon has provided a review of opportunities available through traditional opportunities and tax reform changes below.
Tax Planning Opportunities – Tax Reform
When tax reform was passed in late 2017, many Atlanta business owners were unsure how the changes would impact their business’ taxes. Since the change came so late in the year, many providers were also unsure how to apply the new changes. Now that one full tax season has passed, and the IRS has issued over 30 guidance updates, providers have a better understanding of how to apply the changes in a variety of situations. The combination of new guidance and a tax season means the potential for increased opportunities from tax planning.
Qualified Business Income Deduction – Section 199A Deduction
This new deduction allows qualifying business owners to take a maximum amount of a 20% deduction for their share of business income. Owners of pass-through entities like partnerships, S-corporations, and sole proprietors are eligible for participation. This deduction is often used by manufacturing, construction, real estate, and retail and companies. The IRS has released a large amount of guidance on issues and questions that arose during the last year. It’s important to check with your Atlanta tax accountant to determine if you are eligible for a full or partial deduction.
Business Loss Limitation & Net Operating Loss (NOL) Changes
Tax reform changed the loss amount that can be recognized in a single year, limiting business owners to a deduction of $250,000 against other current year income. Any additional loss will result in a Net Operating Loss (NOL) which are now more restricted in how they can be used. Under the new law, businesses can no longer use post-2017 federal NOLs to offset prior year income and can only use them to offset 80% of current year income. This represents a significant change in how businesses can use NOLs as part of tax planning. It’s important to consult with your advisor to see how this may impact the company’s tax situation.
A key area where tax reform impacted businesses is with changes to like-kind exchanges (1031 exchanges). The opportunity to defer capital gains has been altered since these exchanges are now limited to real property only. However, impacted taxpayers may want to consider investing in a Qualified Opportunity Zone (OZ) fund before the end of the year. If the taxpayer has recognized a gain from the sale of property (including investments), they should consider investing the gain into an OZ fund to receive a triple-tax benefit of deferred recognition of the capital gains, a discount in the recognized amount, and the exclusion of gain on the investment itself. The IRS has released updates and guidance which make it easy to understand how the program functions and the tax-saving potential.
Tax reform also brought significant changes for companies to increase their tax savings from both depreciation of Section 179 property and bonus depreciation. First, there was an increase in the deduction limits of qualifying 179 property from $500,000 to $1M, and an increase in the phase-out threshold from $2M to $2.5M. The bonus depreciation limit was changed from 50% to 100%, which allows a company to now expense and deduct qualifying expenses in the same year property or assets were placed into service. The result is a powerful tax savings opportunity for Atlanta companies with qualifying activities.
“Traditional” Tax Planning Opportunities
There were many traditional tax planning strategies that were not affected by tax reform and should be considered as part of the year-end tax planning process.
- Prepayment of business expenses including insurance (general liability, workers compensation or malpractice), rent, mortgage or professional association dues and subscriptions.
- Make Qualified Charitable Contributions from the company to reduce taxable income. Run the numbers to identify what the depreciation strategy should be. Should the company elect out of bonus depreciation so that it can spread the costs of those equipment expenditures out over several years?
- Take time to write off bad debt on revenue that is not collectible. This will lower the company’s overall revenue, profits and ensuing tax liabilities.
- If you plan to give holiday bonuses, make sure they go out before the end of the year so you can take the payroll deduction.
- Collect W-9 forms from vendors who provided you a service. You will need to draft your 1099 forms by January 31st.
- As far as possible, consider delaying billing to allow the revenue to be counted in 2020 and not impact 2019 taxes.
There have been significant changes to tax laws leaving many Atlanta business owners unsure how to approach tax planning. If your current provider has not approached you about the topics outlined above, then you should consider exploring these important tax-saving opportunities. In any case, now is the time to make changes before the end of the year. For additional information on tax planning or to inquire about how your company can take advantage of these opportunities, Windham Brannon can help. For additional information call us at 404-898-2000 or click here to contact us.