BY EIDE BAILLY’S TRANSACTION SERVICES TEAM
In the midst of current economic uncertainty, organizations are seeking ways to contain costs, enhance cash balances, and reduce tax liabilities. A productive way to do this is through year-end tax planning. Now is a great time to consider implementing strategies that defer income and/or accelerate deductions for tax reporting that can save you money.
While many think of taxes primarily around March and April annually, year-round, proactive tax planning can help you be better prepared to minimize your overall federal and state tax burden and ensure you take full advantage of available credits and deductions. Tax planning, especially as we approach the end of the calendar, is smart business planning.
Following are a few common tax planning strategies that you should consider for your organization even during a time of uncertainty.
UTILIZE DEPRECIATION
Depreciation allows organizations to record the economic value loss of an asset over time as a tax-deductible expense. Depreciation reduces taxable income and, consequently, an organization’s overall tax burden. Thanks to the 2018 Tax Cuts and Jobs Act, organizations can currently depreciate 100% of qualified property in the year acquired up to $1 million annually until 2022; thereafter a phase-down of the bonus depreciation percentage by 20% each year from 2023 through 2026 will occur. Qualifying new or used assets purchased, even on credit, and placed in service by December 31 will yield a tax deduction of 100% of the asset cost!
Since depreciation is an accounting method, accelerating deductions into years with higher tax rates may result in permanent savings. If you have property that has not been analyzed to ensure the most advantageous depreciation methods are being utilized, now is the time to take another look.
COST SEGREGATION STUDY
A cost segregation study is another way to increase cash flow by utilizing accelerated depreciation methods. Cost segregation studies help to accelerate depreciation deductions associated with real estate, reducing taxes paid currently rather than over future years. A cost segregation study is specifically associated with depreciable real estate. Tax deductions are most often found in instances of real estate renovation, construction, or purchase.
BUSINESS STRUCTURE REVIEW
Business entity type can directly impact your tax planning strategies. The taxation of income and distributions, as well as owner legal liability, are some of the main factors that differentiate business structures. It is important to consider the tax consequences associated with each structure type and whether an alternative structure is available and preferable.
SECTION 199A AND THE 20% PASS-THROUGH DEDUCTION
Certain entity types including pass-through businesses like sole proprietorships, single-member LLCs, and S corporations, can annually deduct 20% of “qualified business income.” Qualified business income is defined as domestic, net business income excluding wages, guaranteed payments, and investment income subject to certain thresholds and limitations. Determine if your business qualifies for the 20% 199A deduction before year-end and, if so, any options available to maximize the current year tax deduction.
TIMING OF INCOME AND EXPENSES
Another way to plan and save from a tax perspective is by properly timing income and expenses, as well as accounting method planning. This key tax planning strategy can help you reduce your overall tax liability. For some organizations, it may mean accelerating income and deferring expenses. For others, it may mean deferring income and accelerating expenses in the current year to decrease your tax liability, lessening the tax burden of your organization and increasing cash flow. Important items to consider when it comes to timing income and expenses include:
• Bonuses / employee compensation
• Fixed asset additions / repairs
• Retirement plan contributions / distributions
• Realized capital gains / losses
• Charitable contributions
UTILIZE CHARITABLE CONTRIBUTIONS
Donating to charities and nonprofits can be an incredibly beneficial tax planning strategy. By controlling the timing of your donation, you can use charitable giving to strategically plan deductions and overall taxable income. Types of contributions to consider include:
• Cash donations
• Stock donations
• IRA donations
• Private foundations or donor-advised funds
• Charitable remainder trusts
• Gifts that qualify for the Montana Endowment Tax Credit
No matter how you decide to contribute, make sure you’re donating to a qualified charity in order to receive tax-deductible contributions. It’s also important to obtain valuations, as needed, to ensure non-cash donations qualify for a tax deduction.
THE IMPORTANCE OF TAX PLANNING
Proactive tax planning can have lasting beneficial implications on your organization and its bottom line. Identifying and implementing strategies to reduce your current tax liability by reviewing income and expenditures better positions your organization for the future while increasing cash flow currently. It’s also important to understand that new legislation and guidance may impact your annual tax planning strategies. Working with a qualified tax advisor to make sense of your tax plan will help ensure compliance and identify strategies to help attain overall business goals.
RON YATES, CPA – Eide Bailly Billings Partner-in-Charge – 406.896.2423 RYates@EideBailly.com
DEBBIE POTTER, CPA – Eide Bailly Billings Partner and Tax Department Head – 406.896.2498 DPotter@EideBailly.com
Originally published on EideBailly.com.