If you own a business, consider the following tax saving strategies to minimize your 2020 tax bill.
Net Operating Losses (NOLs)
The CARES Act temporarily eased up on many of the NOL limitations implemented under the Tax Cuts and Jobs Act (TCJA). If your business expects a loss in 2020, you should know that you will be able to carry 100% of that loss back to the prior five tax years. If you had an NOL carried into the 2020 tax year, you can claim a deduction equal to 100% of your 2020 taxable income.
Establish a Tax-Favorable Retirement Plan
If your business doesn’t already have a retirement plan, now could be the right time to set one up. Current retirement plan rules allow for significant deductible contributions. Just be aware that if your business has employees, you may have to cover them too.
Take Advantage of Generous Depreciation Deductions
100% first-year depreciation is available for qualified new and used property acquired and placed in service in the calendar year 2020. That means your business might be able to write off the entire cost of some, or all, of your 2020 asset additions on this year’s tax return.
Thanks to the CARES Act, Qualified Improvement Property (QIP) is now eligible for bonus depreciation, or it can be depreciated over 15 years rather than 39 years, as it was under the old law. Consider making additional acquisitions, including QIP acquisitions, between now and year-end.
Time Business Income and Deductions for Tax Savings
If your business is a pass-through entity, the traditional strategy of deferring income into next year while accelerating deductible expenses into this year makes sense if you expect to be in the same or lower tax bracket next year.
On the other hand, if you expect to be in a higher tax bracket in 2021 (which could be the case due to COVID-19 or the presidential election results), you would take the opposite approach. Accelerate income into this year, if it is possible, and postpone deductions until 2021.
Watch Out for the Business Interest Expense Limit
The CARES Act temporarily relaxed the unfavorable TCJA limitation on a taxpayer’s deduction for business interest expenses. Under the TCJA, the deduction was limited to the sum of:
- Business interest income
- 30% of adjusted taxable income
- Floor plan financing interest paid by certain vehicle dealers
For 2020, the 30% limit has increased to 50% of adjusted taxable income. Unless there is any additional legislation, the limit will go back to 30% in 2021. Fortunately, many businesses are exempt from this limit. It typically only applies to businesses with average annual gross receipts for the three-tax year period ending with the prior tax year that do not exceed $26 million (adjusted for inflation annually).
Contact Us for More Tax Saving Strategies
These tax saving strategies only cover some of the year-end tax planning moves that could benefit you and your business. Please contact us if you have questions, want more information, or would like us to help in designing a year-end planning strategy that provides the best tax results for your circumstances.