Category: Business Tax Planning
Posted: December 2020
The best year-end tax planning strategy for many taxpayers is to still follow the time-honored approach of deferring income and accelerating deductions to minimize 2020 taxes. Deferring income also may help you minimize or avoid adjusted gross income (AGI)-based phaseouts of various tax breaks that apply for 2020. As always, however, year-end tax planning doesn’t occur in a vacuum. It must take into account each taxpayer’s specific situation and planning goals, with the aim of minimizing taxes to the greatest extent possible.
While most taxpayers will come out ahead by following the traditional approach, others with special circumstances may do better by accelerating income and deferring deductions. In some situations, total combined taxes for 2020 and 2021 will be reduced if income is accelerated from 2021 into 2020 and certain expenses are deferred to 2021 where they may give a greater tax benefit in that year.
In addition to shifting income and expenses, here are several other actions that taxpayers can take before the end of the year to reduce their 2020 tax bills.
Section 179 Expensing and Depreciation
Under the Tax Cuts and Jobs Act of 2017 (TCJA), the Section 179 expense deduction increases to a maximum deduction of $1.04 million of the first $2.59 million of qualifying equipment placed in service during the current tax year. The deduction was indexed to inflation for tax years after 2018 and enhanced to include improvements to nonresidential qualified real property such as roofs, fire protection, alarm and security systems, and heating, ventilation, and air-conditioning systems.
Businesses are allowed to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017, and before January 1, 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.
Corporate Tax Rate Reduction
For businesses, the corporate tax rate has been reduced to 21%, there is no corporate AMT, there are limits on business interest deductions, and there are very generous expensing and depreciation rules. And non-corporate taxpayers with qualified business income from pass-through entities may be entitled to a special 20% deduction.
New for 2020: CARES Act makes changes to Net Operating Losses (NOLs) rules
For NOL years beginning before 2021, the CARES Act removes the limitation on deductions for prior year NOLs carried over into tax years before 2021; previously an 80%-of-taxable-income limitation existed.
For NOLs arising in 2018-2020, the CARES Act requires NOLs to be carried back for five years, unless the taxpayer makes a Code Sec. 965(n) election.
For example, if a client has an NOL generated in 2020, that NOL can be carried back to 2015 and offset against taxable income to generate tax refunds. Because tax rates were generally higher prior to the TCJA, a significant opportunity exists in carrying a post-TCJA loss back to higher taxed years.
Even if 2020 will be an unprofitable year for a taxpayer’s business, tax planning is necessary since a loss can be turned to an advantage by using it to recover taxes paid in other years. This is made possible by the carryforward provision, which generally permits a 2020 net operating loss (NOL) to be taken as an additional deduction for each future year until it is used up.
2020 Standard Mileage Rate
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