Now is the time to think about 2019 tax planning — before you find yourself in a year-end scramble.
“Business owners have a better sense of what kind of year they are having, and how that may impact their tax bill. They still have time to act,” says Jane Pfeifer, CPA, Shareholder at Clark Schaefer Hackett.
Smart Business spoke with Pfeifer about how taxpayers can plan ahead to fully utilize beneficial tax options.
How did the finalized Tax Cuts and Jobs Act (TCJA) regulations and most recent IRS notifications impact planning?
Under the TCJA, the Section 199A business income deduction was created, allowing taxpayers who own interests in pass-through entities to take a 20 percent deduction of qualified business income earned in a qualified trade or business. Taxpayers need to know where they fall under the clarified regulations. The deduction does not apply to attorneys, accountants, doctors or dentists, and certain other professional service providers whose income is above $350,000 for married filing joint taxpayers or $157,500 for those filing as single taxpayers.
The TCJA made changes to Section 163(j) regarding limitations on interest deductions, which can have a significant impact on a taxpayer’s 2019 tax bill. This is another area where regulations were delayed.
If a company’s gross receipts are above $25 million, deductions for interest expense are limited to 30 percent of taxable income from the business, before depreciation, amortization and interest expense. If an entity has a loss for the year, its interest deduction may be limited. Or, if a business is highly leveraged, it may not get that full deduction if gross receipts are above the limit. Also, the gross receipts of all related entities may need to be considered.
How can depreciation help business owners?
To reduce income taxes, a business owner may want to purchase and place new fixed assets in service by the end of the year. Under Section 179, entities can elect to expense up to $1 million of qualifying property, which includes HVAC equipment, fire protection or security systems. This break is phased out for qualifying purchases over $2.5 million. In addition, 100 percent bonus depreciation is still in play for 2019.
While these deductions do not apply to real estate purchases, a cost segregation study divides a building into components, where some might qualify for accelerated depreciation. For instance, special wiring or adaptations required to run equipment can be reclassified to a shorter depreciable life.
Many states, however, disallow the aggressive depreciation deductions that are available on a federal level.
What changed for individual returns?
The standard deduction increased. For 2019, it is $12,200 for individuals and $24,400 for joint filers. Therefore, taxpayers may want to take the standard deduction one year and itemize the next. This can be done by accelerating 2020 charitable donations into 2019. Individuals may be able to do the same thing with medical expenses if these expenses exceed the adjusted gross income threshold.
Many people under-withheld in 2018. While taxpayers should have addressed this early in 2019, there is still time to mitigate under-withholding.The IRS requires a minimum withholding of 22 percent for special compensation like restricted stock or bonuses. Depending on a person’s overall tax bracket, the minimum is often not enough. Looking at this now may avoid an unpleasant surprise in April 2020.
What else should taxpayers keep in mind?
Individuals need to understand their capital loss carryforwards and investment portfolio. Should taxpayers offload underperforming stocks to generate a loss at the end of 2019 and offset gains? Could sales that generate gains be offset by loss carryforwards?
Taxpayers also should consider maximizing retirement and health saving account (HSA) deferrals. Individuals 49 and younger can defer up to $19,000 in a 401(k) plan; 50 or over can contribute up to $25,000. HSA contributions max out at $7,000 for family plans or $3,500 for individual plans. Taxpayers who are 55 or older can contribute an extra $1,000. If medical expenses such as braces, glasses, hearing aids, etc., are on the horizon, funding an HSA is like getting a tax deduction by moving money from one pocket to the other.
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