New rules will soon require employers to annually disclose retirement income to employees
As you’ve probably heard, a new law was recently passed with a
wide range of retirement plan changes for employers and individuals. One of the
provisions of the SECURE Act involves a new requirement for employers that sponsor
tax-favored defined contribution retirement plans that are subject to ERISA.
Specifically, the law will require that the benefit statements
sent to plan participants include a lifetime income disclosure at least once
during any 12-month period. The disclosure will need to illustrate the monthly
payments that an employee would receive if the total account balance were used
to provide lifetime income streams, including a single life annuity and a
qualified joint and survivor annuity for the participant and the participant’s
surviving spouse.
Background Information
Under ERISA, a defined contribution plan administrator is required to provide benefit statements to participants. Depending on the situation, these statements must be provided quarterly, annually or upon written request. In 2013, the U.S. Department of Labor (DOL) issued an advance notice of proposed rule making providing rules that would have required benefit statements provided to defined contribution plan participants to include an estimated lifetime income stream of payments based on the participant’s account balance.
Some employers began providing this information in these
statements — even though it wasn’t required.
But in the near future, employers will have to begin providing
information to their employees about lifetime income streams.
Effective Date
Fortunately, the effective date of the requirement has been
delayed until after the DOL issues guidance. It won’t go into effect until 12
months after the DOL issues a final rule. The law also directs the DOL to
develop a model disclosure.
Plan fiduciaries, plan sponsors, or others won’t have liability
under ERISA solely because they provided the lifetime income stream
equivalents, so long as the equivalents are derived in accordance with the
assumptions and guidance and that they include the explanations contained in
the model disclosure.
Stay Tuned
Critics of the new rules argue the required disclosures will
lead to confusion among participants and they question how employers will
arrive at the income projections. For now, employers have to wait for the DOL
to act. We’ll update you when that happens. Contact us if you have questions
about this requirement or other provisions in the SECURE Act.
© 2019
Tax Developments: Summary of the 2019 SECURE Act provisions affecting business and individual taxpayers
On December 20, 2019, the SECURE Act, a new tax law included
as part of the Further Consolidated Appropriations Act of 2020, was enacted.
The “Setting Every Community Up for Retirement Enhancement” (SECURE) Act
expands the ability for individuals to maximize their savings and makes
simplifications to the qualified retirement system. This article outlines
specific provisions of the act in summary form and explains the mechanics of
the rules under old and new law.
The changes to the Internal Revenue Code made by this act
apply to individuals who are participants in qualified retirement plans and to
sponsors (i.e. employers) that administer such plans.
The additional flexibility offered by these rules should
help certain individuals, especially those working longer, those working while
obtaining advanced degrees, and families looking to save for college obtain
flexibility in the accumulation and utilization of retirement funds. For
changes to stretch IRAs, many individuals are recommended to review their
estate planning to ensure that the distribution of any retirement accounts is
handled according to their wishes and in accord with new law.
The changes in the Kiddie Tax rules may be a planning
opportunity for families with children who have unearned (usually investment)
income. The ability to elect to apply these rules retroactively may be a place
to find tax savings if the changes under the TCJA had increased the family’s
tax liability in 2018 and 2019.
For employers, the flexibility in setting up a plan and the
expansion of credits available for new plans should make offering qualified
retirement benefits to employees much more attractive. The ability to combine
multiple plans for more efficient growth and investment results should benefit
retirees with increased returns over the life of the plan. At the same time,
increases in penalties means that employers who do administer plans should be
taking extra care that they are meeting all compliance and fiduciary
requirements.
Individuals
Repeal of the maximum age for traditional IRA contributions.
Before 2020, traditional IRA contributions were not allowed
once the individual attained age 70½. Starting in 2020, the new rules allow an
individual of any age to make contributions to a traditional IRA, as long as
the individual has compensation, which generally means earned income from wages
or self-employment.
Required minimum distribution age raised from 70½ to 72.
Before 2020, retirement plan participants and IRA owners
were generally required to begin taking required minimum distributions, or
RMDs, from their plan by April 1 of the year following the year they reached
age 70½. The age 70½ requirement was first applied in the retirement plan
context in the early 1960s and, until recently, had not been adjusted to account
for increases in life expectancy.
For distributions required to be made after Dec. 31, 2019,
for individuals who attain age 70½ after that date, the age at which
individuals must begin taking distributions from their retirement plan or IRA
is increased from 70½ to 72.
Partial elimination of stretch IRAs.
For deaths of plan participants or IRA owners occurring
before 2020, beneficiaries (both spousal and nonspousal) were generally allowed
to stretch out the tax-deferral advantages of the plan or IRA by taking
distributions over the beneficiary s life or life expectancy (in the IRA
context, this is sometimes referred to as a “stretch IRA”).
However, for deaths of plan participants or IRA owners
beginning in 2020 (later for some participants in collectively bargained plans
and governmental plans), distributions to most nonspouse beneficiaries are
generally required to be distributed within ten years following the plan
participant s or IRA owner s death. So, for those beneficiaries, the
“stretching” strategy is no longer allowed.
Exceptions to the 10-year rule are allowed for distributions
to (1) the surviving spouse of the plan participant or IRA owner; (2) a child
of the plan participant or IRA owner who has not reached majority; (3) a
chronically ill individual; and (4) any other individual who is not more than
ten years younger than the plan participant or IRA owner. Those beneficiaries
who qualify under this exception may generally still take their distributions
over their life expectancy (as allowed under the rules in effect for deaths
occurring before 2020).
Expansion of Section 529 education savings plans to cover registered apprenticeships and distributions to repay certain student loans.
A Section 529 education savings plan (a 529 plan, also known
as a qualified tuition program) is a tax-exempt program established and
maintained by a state, or one or more eligible educational institutions (public
or private). Any person can make nondeductible cash contributions to a 529 plan
on behalf of a designated beneficiary. The earnings on the contributions
accumulate tax-free. Distributions from a 529 plan are excludable up to the
amount of the designated beneficiary's qualified higher education expenses.
Before 2019, qualified higher education expenses didn't include
the expenses of registered apprenticeships or student loan repayments.
But for distributions made after Dec. 31, 2018 (the
effective date is retroactive), tax-free distributions from 529 plans can be
used to pay for fees, books, supplies, and equipment required for the
designated beneficiary s participation in an apprenticeship program. In
addition, tax-free distributions (up to $10,000) are allowed to pay the
principal or interest on a qualified education loan of the designated
beneficiary, or a sibling of the designated beneficiary.
Kiddie tax changes for gold star children and others.
In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA,
P.L. 115-97), which made changes to the so-called “kiddie tax,” which is a tax
on the unearned income of certain children. Before enactment of the TCJA, the
net unearned income of a child was taxed at the parents' tax rates if the
parents' tax rates were higher than the tax rates of the child.
Under the TCJA, for tax years beginning after Dec. 31, 2017,
the taxable income of a child attributable to net unearned income is taxed
according to the brackets applicable to trusts and estates. Children to whom
the kiddie tax rules apply and who have net unearned income also have a reduced
exemption amount under the alternative minimum tax (AMT) rules.
There had been concern that the TCJA changes unfairly
increased the tax on certain children, including those who were receiving
government payments (i.e., unearned income) because they were survivors of
deceased military personnel (“gold star children”), first responders, and
emergency medical workers.
The new rules enacted on Dec. 20, 2019, repeal the kiddie
tax measures that were added by the TCJA. So, starting in 2020 (with the option
to start retroactively in 2018 and/or 2019), the unearned income of children is
taxed under the pre-TCJA rules, and not at trust/estate rates. And starting
retroactively in 2018, the new rules also eliminate the reduced AMT exemption
amount for children to whom the kiddie tax rules apply and who have net
unearned income.
Penalty-free retirement plan withdrawals for expenses related to the birth or adoption of a child.
Generally, a distribution from a retirement plan must be
included in income. And, unless an exception applies (for example, distributions
in case of financial hardship), a distribution before the age of 59-1/2 is
subject to a 10% early withdrawal penalty on the amount includible in income.
Starting in 2020, plan distributions (up to $5,000) that are
used to pay for expenses related to the birth or adoption of a child are
penalty-free. That $5,000 amount applies on an individual basis, so for a
married couple, each spouse may receive a penalty-free distribution up to
$5,000 for a qualified birth or adoption.
Taxable non-tuition fellowship and stipend payments are treated as compensation for IRA purposes.
Before 2020, stipends and non-tuition fellowship payments
received by graduate and postdoctoral students were not treated as compensation
for IRA contribution purposes, and so could not be used as the basis for making
IRA contributions.
Starting in 2020, the new rules remove that obstacle by
permitting taxable non-tuition fellowship and stipend payments to be treated as
compensation for IRA contribution purposes. This change will enable these
students to begin saving for retirement without delay.
Tax-exempt difficulty-of-care payments are treated as compensation for determining retirement contribution limits.
Many home healthcare workers do not have taxable income
because their only compensation comes from “difficulty-of-care” payments that
are exempt from taxation. Because those workers do not have taxable income,
they were not able to save for retirement in a qualified retirement plan or
IRA.
For IRA contributions made after Dec. 20, 2019 (and
retroactively starting in 2016 for contributions made to certain qualified
retirement plans), the new rules allow home healthcare workers to contribute to
a retirement plan or IRA by providing that tax-exempt difficulty-of-care
payments are treated as compensation for purposes of calculating the
contribution limits to certain qualified plans and IRAs.
Businesses
Unrelated employers are more easily allowed to band together to create a single retirement plan.
A multiple employer plan (MEP) is a single plan maintained
by two or more unrelated employers. Starting in 2021, the new rules reduce the
barriers to creating and maintaining MEPs, which will help increase
opportunities for small employers to band together to obtain more favorable
investment results, while allowing for more efficient and less expensive
management services.
New small employer automatic plan enrollment credit.
Automatic enrollment is shown to increase employee
participation and higher retirement savings. Starting in 2020, the new rules
create a new tax credit of up to $500 per year to employers to defray start-up
costs for new 401(k) plans and SIMPLE IRA plans that include automatic
enrollment. The credit is in addition to an existing plan start-up credit, and
is available for three years. The new credit is also available to employers who
convert an existing plan to a plan with an automatic enrollment design.
Increase credit for small employer pension plan start-up costs.
The new rules increase the credit for plan start-up costs to
make it more affordable for small businesses to set up retirement plans.
Starting in 2020, the credit is increased by changing the calculation of the
flat dollar amount limit on the credit to the greater of (1) $500, or (2) the
lesser of: (a) $250 multiplied by the number of nonhighly compensated employees
of the eligible employer who are eligible to participate in the plan, or (b)
$5,000. The credit applies for up to three years.
Expand retirement savings by increasing the auto enrollment safe harbor cap.
An annual nondiscrimination test called the actual deferral
percentage (ADP) test applies to elective deferrals under a 401(k) plan. The
ADP test is deemed to be satisfied if a 401(k) plan includes certain minimum
matching or non-elective contributions under either of two safe harbor plan
designs and meets certain other requirements. One of the safe harbor plans is
an automatic enrollment safe harbor plan.
Starting in 2020, the new rules increase the cap on the
default rate under an automatic enrollment safe harbor plan from 10% to 15%,
but only for years after the participant's first deemed election year. For the
participant's first deemed election year, the cap on the default rate is 10%.
Allow long-term part-time employees to participate in 401(k) plans.
Currently, employers are generally allowed to exclude
part-time employees (i.e., employees who work less than 1,000 hours per year)
when providing certain types of retirement plans—like a 401(k) plan—to their
employees. As women are more likely than men to work part-time, these rules can
be especially harmful for women in preparing for retirement.
However, starting in 2021, the new rules will require most
employers maintaining a 401(k) plan to have a dual eligibility requirement
under which an employee must complete either a one-year-of-service requirement
(with the 1,000-hour rule), or three consecutive years of service where the
employee completes at least 500 hours of service per year. For employees who
are eligible solely by reason of the new 500-hour rule, the employer will be
allowed to exclude those employees from testing under the nondiscrimination and
coverage rules, and from the application of the top-heavy rules.
Loosen notice requirements and amendment timing rules to facilitate adoption of nonelective contribution 401(k) safe harbor plans.
The actual deferral percentage nondiscrimination test is
deemed to be satisfied if a 401(k) plan includes certain minimum matching or
nonelective contributions under either of two plan designs (referred to as a
“401(k) safe harbor plan”), as well as certain required rights and features,
and satisfies a notice requirement. Under one type of 401(k) safe harbor plan,
the plan either (1) satisfies a matching contribution requirement, or (2)
provides for a nonelective contribution to a defined contribution plan of at
least 3% of an employee's compensation on behalf of each nonhighly compensated
employee who is eligible to participate in the plan.
Starting in 2020, the new rules change the nonelective
contribution 401(k) safe harbor to provide greater flexibility, improve
employee protection, and facilitate plan adoption. The new rules eliminate the
safe harbor notice requirement, but maintain the requirement to allow employees
to make or change an election at least once per year. The rules also permit
amendments to nonelective status at any time before the 30th day before the
close of the plan year. Amendments after that time are allowed if the amendment
provides (1) a nonelective contribution of at least 4% of compensation (rather
than at least 3%) for all eligible employees for that plan year, and (2) the
plan is amended no later than the last day for distributing excess
contributions for the plan year (i.e., by the close of following plan year).
Expansion of portability of lifetime income options.
Starting in 2020, the new rules permit certain retirement
plans to make a direct trustee-to-trustee transfer to another
employer-sponsored retirement plan, or IRA, of a lifetime income investment or
distributions of a lifetime income investment in the form of a qualified plan
distribution annuity, if a lifetime income investment is no longer authorized
to be held as an investment option under the plan. This change permits
participants to preserve their lifetime income investments and avoid surrender
charges and fees.
Qualified employer plans barred from making loans through credit cards and similar arrangements.
After Dec. 20, 2019, plan loans may no longer be distributed
through credit cards or similar arrangements. This change is intended to ensure
that plan loans are not used for routine or small purchases, thereby helping to
preserve retirement savings.
Nondiscrimination rules modified to protect older, longer service participants in closed plans.
Starting in 2020, the nondiscrimination rules as they
pertain to closed pension plans (i.e., plans closed to new entrants) are being
changed to permit existing participants to continue to accrue benefits. The
modification will protect the benefits for older, longer-service employees as
they near retirement.
Plans adopted by filing due date for year may be treated as in effect as of close of year.
Starting in 2020, employers can elect to treat qualified
retirement plans adopted after the close of a tax year, but before the due date
(including extensions) of the tax return, as having been adopted as of the last
day of the year. The additional time to establish a plan provides flexibility
for employers who are considering adopting a plan, and the opportunity for
employees to receive contributions for that earlier year.
New annual disclosures required for estimated lifetime income streams.
The new rules (starting at a to-be-determined future date)
will require that plan participants' benefit statements include a lifetime
income disclosure at least once during any 12-month period. The disclosure will
have to illustrate the monthly payments the participant would receive if the
total account balance were used to provide lifetime income streams, including a
qualified joint and survivor annuity for the participant and the participant s
surviving spouse and a single life annuity.
Fiduciary safe harbor added for selection of annuity providers.
When a plan sponsor selects an annuity provider for the
plan, the sponsor is considered a plan “fiduciary,” which generally means that
the sponsor must discharge his or her duties with respect to the plan solely in
the interests of plan participants and beneficiaries (this is known as the
“prudence requirement”).
Starting on Dec. 20, 2019 (the date the SECURE Act was
signed into law), fiduciaries have an optional safe harbor to satisfy the
prudence requirement in their selection of an insurer for a guaranteed
retirement income contract, and are protected from liability for any losses
that may result to participants or beneficiaries due to an insurer's future
inability to satisfy its financial obligations under the terms of the contract.
Removing ambiguity about the applicable fiduciary standard eliminates a
roadblock to offering lifetime income benefit options under a plan.
Increased penalties for failure-to-file retirement plan returns.
Starting in 2020, the new rules modify the failure-to-file
penalties for retirement plan returns.
The penalty for failing to file a Form 5500 (for annual plan
reporting) is changed to $250 per day, not to exceed $150,000.
A taxpayer's failure to file a registration statement incurs
a penalty of $10 per participant per day, not to exceed $50,000.
The failure to file a required notification of change
results in a penalty of $10 per day, not to exceed $10,000.
The failure to provide a required withholding notice results in a penalty of $100 for each failure, not to exceed $50,000 for all failures during any calendar year. For planning opportunities or to learn more about these changes, please contact our office at 617-651-0531 or by using our contact us form below.
New law provides a variety of tax breaks to businesses and employers
While you were celebrating the holidays, you may not have
noticed that Congress passed a law with a grab bag of provisions that provide
tax relief to businesses and employers. The “Further Consolidated
Appropriations Act, 2020” was signed into law on December 20, 2019. It makes
many changes to the tax code, including an extension (generally through 2020)
of more than 30 provisions that were set to expire or already expired.
Two other laws were passed as part of the law (The Taxpayer
Certainty and Disaster Tax Relief Act of 2019 and the Setting Every Community
Up for Retirement Enhancement Act).
Here are five highlights.
Long-term part-timers can participate in
401(k)s.
Under current law, employers generally can exclude part-time
employees (those who work less than 1,000 hours per year) when providing a
401(k) plan to their employees. A qualified retirement plan can generally delay
participation in the plan based on an employee attaining a certain age or
completing a certain number of years of service but not beyond the later of
completion of one year of service (that is, a 12-month period with at least
1,000 hours of service) or reaching age 21.
Qualified retirement plans are subject to various other
requirements involving who can participate.
For plan years beginning after December 31, 2020, the new law
requires a 401(k) plan to allow an employee to make elective deferrals if the
employee has worked with the employer for at least 500 hours per year for at
least three consecutive years and has met the age-21 requirement by the end of
the three-consecutive-year period. There are a number of other rules involved
that will determine whether a part-time employee qualifies to participate in a
401(k) plan.
The employer tax credit for paid family and
medical leave is extended.
Tax law provides an employer credit for paid family and medical
leave. It permits eligible employers to claim an elective general business
credit based on eligible wages paid to qualifying employees with respect to
family and medical leave. The credit is equal to 12.5% of eligible wages if the
rate of payment is 50% of such wages and is increased by 0.25 percentage points
(but not above 25%) for each percentage point that the rate of payment exceeds
50%. The maximum leave amount that can be taken into account for a qualifying
employee is 12 weeks per year.
The credit was set to expire on December 31, 2019. The new law
extends it through 2020.
The Work Opportunity Tax Credit (WOTC) is
extended.
Under the WOTC, an elective general business credit is provided
to employers hiring individuals who are members of one or more of 10 targeted
groups. The new law extends this credit through 2020.
The medical device excise tax is repealed.
The Affordable Care Act (ACA) contained a provision that required
that the sale of a taxable medical device by the manufacturer, producer or
importer is subject to a tax equal to 2.3% of the price for which it is sold.
This medical device excise tax originally applied to sales of taxable medical
devices after December 31, 2012.
The new law repeals the excise tax for sales occurring after
December 31, 2019.
The high-cost, employer-sponsored health
coverage tax is repealed.
The ACA also added a nondeductible excise tax on insurers when
the aggregate value of employer-sponsored health insurance coverage for an
employee, former employee, surviving spouse or other primary insured individual
exceeded a threshold amount. This tax is commonly referred to as the tax on
“Cadillac” plans.
The new law repeals the Cadillac tax for tax years beginning
after December 31, 2019.
Stay tuned
These are only some of the provisions of the new law. We will be
covering them in the coming weeks. If you have questions about your situation,
don’t hesitate to contact us.
© 2019
Adopting a child? Bring home tax savings with your bundle of joy
If you’re adopting a child, or you adopted one this year, there
may be significant tax benefits available to offset the expenses. For 2019,
adoptive parents may be able to claim a nonrefundable credit against their
federal tax for up to $14,080 of “qualified adoption expenses” for each adopted
child. (This amount is increasing to $14,300 for 2020.) That’s a
dollar-for-dollar reduction of tax — the equivalent, for someone in the 24%
marginal tax bracket, of a deduction of over $50,000.
Adoptive parents may also be able to exclude from their gross
income up to $14,080 for 2019 ($14,300 for 2020) of qualified adoption expenses
paid by an employer under an adoption assistance program. Both the credit and
the exclusion are phased out if the parents’ income exceeds certain limits, as
explained below.
Adoptive parents may claim both a credit and an exclusion for
expenses of adopting a child. But they can’t claim both a credit and an
exclusion for the same expense.
Qualified adoption expenses
To qualify for the credit or the exclusion, the expenses must be
“qualified.” These are the reasonable and necessary adoption fees, court costs,
attorney fees, travel expenses (including amounts spent for meals and lodging)
while away from home, and other expenses directly related to the legal adoption
of an “eligible child.”
Expenses in connection with an unsuccessful attempt to adopt an
eligible child can qualify. However, expenses connected with a foreign adoption
(one in which the child isn’t a U.S. citizen or resident) qualify only if the
child is actually adopted.
Taxpayers who adopt a child with special needs get a special tax
break. They will be deemed to have qualified adoption expenses in the tax year
in which the adoption becomes final in an amount sufficient to bring their
total aggregate expenses for the adoption up to $14,300 for 2020 ($14,080 for
2019). In other words, they can take the adoption credit or exclude
employer-provided adoption assistance up to that amount, whether or not they
had $14,300 for 2020 ($14,080 for 2019) of actual expenses.
Phase-out for high-income taxpayers
The credit allowable for 2019 is phased out for taxpayers with
adjusted gross income (AGI) of $211,160 ($214,520 for 2020). It is eliminated
when AGI reaches $251,160 for 2019 ($254,520 for 2020).
Taxpayer ID number required
The IRS can disallow the credit and the exclusion unless a valid
taxpayer identification number (TIN) for the child is included on the return.
Taxpayers who are in the process of adopting a child can get a temporary
number, called an adoption taxpayer identification number (ATIN), for the
child. This enables adoptive parents to claim the credit and exclusion for
qualified expenses.
When the adoption becomes final, the adoptive parents must apply
for a Social Security number for the child. Once obtained, that number, rather
than the ATIN, is used.
We can help ensure that you meet all the requirements to get the
full benefit of the tax savings available to adoptive parents. Please contact
us if you have any questions
© 2019
2 valuable year-end tax-saving tools for your business
At this time of year, many business owners ask if there’s anything they can do to save tax for the year. Under current tax law, there are two valuable depreciation-related tax breaks that may help your business reduce its 2019 tax liability. To benefit from these deductions, you must buy eligible machinery, equipment, furniture or other assets and place them into service by the end of the tax year. In other words, you can claim a full deduction for 2019 even if you acquire assets and place them in service during the last days of the year.
The Section 179 deduction
Under Section 179, you can deduct (or expense) up to 100% of the cost of qualifying assets in Year 1 instead of depreciating the cost over a number of years. For tax years beginning in 2019, the expensing limit is $1,020,000. The deduction begins to phase out on a dollar-for-dollar basis for 2019 when total asset acquisitions for the year exceed $2,550,000.
Sec. 179 expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It’s also available for:
- Qualified improvement property (generally, any interior improvement to a building’s interior, but not for the internal structural framework, for enlarging a building, or for elevators or escalators),
- Roofs, and
- HVAC, fire protection, alarm, and security systems.
The Sec. 179 deduction amount and the ceiling limit are significantly higher than they were a few years ago. In 2017, for example, the deduction limit was $510,000, and it began to phase out when total asset acquisitions for the tax year exceeded $2.03 million.
The generous dollar ceiling that applies this year means that many small and medium sized businesses that make purchases will be able to currently deduct most, if not all, of their outlays for machinery, equipment and other assets. What’s more, the fact that the deduction isn’t prorated for the time that the asset is in service during the year makes it a valuable tool for year-end tax planning.
Bonus depreciation
Businesses can claim a 100% bonus first year depreciation deduction for machinery and equipment bought new or used (with some exceptions) if purchased and placed in service this year. The 100% deduction is also permitted without any proration based on the length of time that an asset is in service during the tax year.
Business vehicles
It’s important to note that Sec. 179 expensing and bonus depreciation may also be used for business vehicles. So buying one or more vehicles before December 31 may reduce your 2019 tax liability. But, depending on the type of vehicle, additional limits may apply.
Businesses should consider buying assets now that qualify for the liberalized depreciation deductions. Please contact us if you have questions about depreciation or other tax breaks.
Bridging the gap between budgeting and risk management
At many companies, a wide gap exists between the budgeting process and risk management. Failing to consider major threats could leave you vulnerable to high-impact hits to your budget if one or more of these dangers materialize. Here are some common types of risks to research, assess and incorporate into adjustments to next year’s budget:
Competitive. No business is an island (or a monopoly for that matter). The relative strength and strategies of your competitors affect how your company should shape its budget. For this reason, gathering competitive intelligence and acting accordingly is a must.
For example, if a larger competitor has moved into your market, you may need to allocate more funds for marketing and advertising. Then again, if a long-time rival has closed up shop, you might be able to keep those costs the same (or even lower them) and channel more money into production as business picks up.
Compliance. Although federal regulatory oversight has moderated under the current presidential administration, many industries remain subject to myriad rules and regulations. State governments have also been aggressive in their efforts to gather additional revenue through oversight.
Look into how compliance rules might change for your business next year. Could a planned strategic move subject you to additional or stricter regulations? Factor compliance risks into your budget, whether in the form of increased administrative requirements or costly penalties if you slip up.
Internal. The U.S. economy is considered relatively strong. But that doesn’t mean you should worry any less about what’s arguably the biggest internal risk to your budget: fraud. Employees may still have plenty of rationales for stealing from you and, perhaps disturbingly, a 2019 benchmarking report from the Association of Certified Fraud Examiners found that 58% of in-house fraud investigation teams had inadequate levels of antifraud staffing and resources.
If this year’s budget suffered from fraud losses, you’ll absolutely need to allocate more dollars to tightened internal controls. But doing so could be a good idea anyway to minimize the possibility that a fraudster will strike. And, of course, fraud isn’t the only internal risk to consider. Will your hiring costs rise in 2020 because of anticipated turnover or a need to increase staff size? Will training expenses go up because of a strategic initiative or new technology?
As the year winds down, business owners should be giving serious thought to their 2020 budgets based on financial reporting for the year. Our firm can help you undertake a sound budgeting process that includes the identification and assessment of specific threats.
Holiday parties and gifts can help show your appreciation and provide tax breaks
With Thanksgiving behind us, the holiday season is in full swing. At this time of year, your business may want to show its gratitude to employees and customers by giving them gifts or hosting holiday parties. It’s a good idea to understand the tax rules associated with these expenses. Are they tax deductible by your business and is the value taxable to the recipients?
Customer and client gifts
If you make gifts to customers and clients, the gifts are deductible up to $25 per recipient per year. For purposes of the $25 limit, you don’t need to include “incidental” costs that don’t substantially add to the gift’s value, such as engraving, gift wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral — such as small items imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.
The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for all team members of a customer to share) as long as they’re “reasonable.”
Employee gifts
In general, anything of value that you transfer to an employee is included in his or her taxable income (and, therefore, subject to income and payroll taxes) and deductible by your business. But there’s an exception for noncash gifts that constitute a “de minimis” fringe benefit.
These are items small in value and given infrequently that are administratively impracticable to account for. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.
De minimis fringe benefits aren’t included in your employee’s taxable income yet they’re still deductible by your business. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.
Important: Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small and infrequent.
Throwing a holiday party
Under the Tax Cuts and Jobs Act, certain deductions for business-related meals were reduced and the deduction for business entertainment was eliminated. However, there’s an exception for certain recreational activities, including holiday parties.
Holiday parties are fully deductible (and excludible from recipients’ income) so long as they’re primarily for the benefit of non-highly-compensated employees and their families. If customers, and others also attend, holiday parties may be partially deductible.
Spread good cheer
Contact us if you have questions about giving holiday gifts to employees or customers or throwing a holiday party. We can explain the tax rules.
What is your taxpayer filing status?
For tax purposes, December 31 means more than New Year’s Eve celebrations. It affects the filing status box that will be checked on your tax return for the year. When you file your return, you do so with one of five filing statuses, which depend in part on whether you’re married or unmarried on December 31.
More than one filing status may apply, and you can use the one that saves the most tax. It’s also possible that your status options could change during the year.
Here are the filing statuses and who can claim them:
- Single. This status is generally used if you’re unmarried, divorced or legally separated under a divorce or separate maintenance decree governed by state law.
- Married filing jointly. If you’re married, you can file a joint tax return with your spouse. If your spouse passes away, you can generally file a joint return for that year.
- Married filing separately. As an alternative to filing jointly, married couples can choose to file separate tax returns. In some cases, this may result in less tax owed.
- Head of household. Certain unmarried taxpayers may qualify to use this status and potentially pay less tax. The special rules that apply are described below.
- Qualifying widow(er) with a dependent child. This may be used if your spouse died during one of the previous two years and you have a dependent child. Other conditions also apply.
Head of household status
Head of household status is generally more favorable than filing as a single taxpayer. To qualify, you must “maintain a household” that, for more than half the year, is the principal home of a “qualifying child” or other relative that you can claim as your dependent.
A “qualifying child” is defined as someone who:
- Lives in your home for more than half the year,
- Is your child, stepchild, foster child, sibling, stepsibling or a descendant of any of these,
- Is under 19 years old or a student under age 24, and
- Doesn’t provide over half of his or her own support for the year.
Different rules may apply if a child’s parents are divorced. Also, a child isn’t a “qualifying child” if he or she is married and files jointly or isn’t a U.S. citizen or resident.
Maintaining a household
For head of household filing status, you’re considered to maintain a household if you live in it for the tax year and pay more than half the cost of running it. This includes property taxes, mortgage interest, rent, utilities, property insurance, repairs, upkeep, and food consumed in the home. Don’t include medical care, clothing, education, life insurance or transportation.
Under a special rule, you can qualify as head of household if you maintain a home for a parent of yours even if you don’t live with the parent. To qualify, you must be able to claim the parent as your dependent.
Marital status
You must generally be unmarried to claim head of household status. If you’re married, you must generally file as either married filing jointly or married filing separately, not as head of household. However, if you’ve lived apart from your spouse for the last six months of the year and a qualifying child lives with you and you “maintain” the household, you’re treated as unmarried. In this case, you may be able to qualify as head of household.
If you have questions about your filing status, contact us.
TCJA Tax Strategies 2: Capital Gains – accessing the 0% and 15% capital gain rates and tax planning for capital transactions.
Often clients inquire with our office with questions like “What is my capital gains rate?” or “How much will I be taxed on a sale of <insert asset here> in 2019?”
While it is important to understand the amount of tax to be paid on any given transaction, it is even more important to understand the new opportunities afforded to those with capital transactions under the Tax Cuts and Jobs Act. The TCJA significantly expanded the 0% and 15% capital gain rate brackets. By pushing the 20% capital gain rate into higher territory – taxpayers with higher income can access the more favorable rates on their capital sale transactions. By expanding the 15% capital gain rate bracket more gain can also be fit into those brackets allowing for more gains to be taxed at lower rates. Based on historical tax rates and brackets, it’s a pretty great deal.
Capital Gains in General
When considering capital gains, you must first separate your short and long-term gains. Long-term, for these purposes, means gains or losses from investments you held for more than a year. Gains and losses from investments held for one year or less are short-term. Once you isolate your long and short term gains, you must separate your long-term gains and losses into three rate groups:
- the 28% group, consisting of:
- capital gains and losses from collectibles (including works of art, rugs, antiques, metals, gems, stamps, coins, and alcoholic beverages) held for more than one year;
- long-term capital loss carryovers; and
- section 1202 gain (gain from the sale of certain small business stock held for more than five years that's eligible for a 50% exclusion from gross income).
- the 25% group, consisting of “unrecaptured section 1250 gain”—that is, gain on the sale of depreciable real property that's attributable to the depreciation of that property (there are no losses in this group); and
- the 20%/15%/0% group, consisting of long-term capital gains and losses that aren't in the 28% or 25% group—that is, most gains and losses from assets held for more than one year.
While the 28% and 25% rate groups are relevant for many taxpayers, the majority of capital transactions still fall into category #3. As such, this article will focus on planning opportunities for most standard capital transactions.
Once you arrive at a net gain or loss from the three long-term categories above, you must net and apply short term and long term losses to the above:
- Short-term capital losses (including short-term capital loss carryovers) are applied first to reduce short-term capital gains, if any, otherwise taxable at ordinary rates. If you have a net short-term capital loss, it reduces any net long-term gain from the 28% group, then gain from the 25% group, and finally reduces net gain from the 20%/15%/0% group.
- Long-term capital gains and losses are handled as follows. A net loss from the 28% group (including long-term capital loss carryovers) is used first to reduce gain from the 25% group, then to reduce net gain from the 20%/15%/0% group. A net loss from the 20%/15%/0% group is used first to reduce gain from the 28% group, then to reduce gain from the 25% group.
If, after the above netting, you have any long-term capital gain, the gain that's attributable to a particular rate group is taxed at that group's marginal tax rate—28% for the 28% group, 25% for the 25% group, and the following rates for the 20%/15%/0% group:
0%
For 2019, the 0% capital gains tax rate applies to adjusted net capital gain of up to:
- $78,750 for joint filers and surviving spouses;
- $52,750 for heads of household;
- $39,375 for single filers; and,
- $39,375 for married taxpayers filing separately.
15%
For 2019, the 15% tax rate applies to adjusted net capital gain over the amount subject to the 0% rate, and up to:
- $488,850 for joint filers and surviving spouses;
- $244,425 for married taxpayers filing separately;
- $461,700 for heads of household; and,
- $434,550 for single filers.; i.e., for 2018, the 15% tax rate applies to adjusted net capital gain over the amount subject to the 0% rate, and up to: $479,000 for joint filers and surviving spouses; $239,500 for married taxpayers filing separately; $452,400 for heads of household; and, $425,800 for single filers);
20%
Gain that otherwise would be taxed in excess of the amount taxed under the 0% and 15%
A 3.8% tax on net investment income applies to taxpayers with modified adjusted gross income (MAGI) that exceeds $250,000 for joint returns and surviving spouses, $200,000 for single taxpayers and heads of household, or $125,000 for married taxpayers filing separately. After the 3.8% tax is factored in, the top rate on capital gain is 23.8%.
If, after the above netting, you're left with short-term losses or long-term losses (or both), you can use the losses to offset ordinary income, subject to a limit. The maximum annual deduction against ordinary income for the year is $3,000 ($1,500 for married taxpayers filing separately). Any loss not absorbed by the deduction in the current year is carried forward to later years, until all of it is either offset against capital gains or deducted against ordinary income in those years, subject to the $3,000 limit. If you have both net short-term losses and net long-term losses, the net short-term losses are used to offset ordinary income before the net long-term losses are used.
Planning for the 0% and 15% capital gain rate
The first thing to remember is that the 0% and 15% rate brackets apply to LONG-TERM gains only (see above for definition of long-term gains). So make sure when you’re analyzing a transaction that you know the holding period of the asset in question. The holding period starts (usually) when you acquire the asset – the simplest way to think about it is a stock purchase; the holding period begins when you buy the stock. Long-term gains (and reduced rates) are for assets with a holding period of one year or more.
The second important thing to understand is the interaction of your ordinary income and capital income – meaning, how do we actually “access” the preferential rates?
Let’s do an example. Say you know that you’re a Married Filing Joint filer. Say that you also know that you have ordinary income from wages of about $250,000 between you and your spouse. Say you take the standard deduction and have no other adjustments or deductions. Lastly, say you’re planning to sell some company stock that you were awarded a few years ago that has appreciated significantly. How do you know when to sell it and how to you access those beneficial lower tax rates??
For purposes of this example, we’ll say that you have about 10,000 shares of company stock in Startup Co (your employer). You were awarded this stock about 3 years ago when the stock price was $1. The company has done well and the stock is currently trading at $31 per share.
Your basis (investment) in the stock is $10,000 (10,000 shares times the $1 FMV at time of award).
In a potential sale, you have proceeds of $310,000 - if you sell all of the stock.
The potential gain is $310,000 (proceeds) minus $10,000 (basis) = $300,000 of long-term capital gain.
Here’s a rough summary of how you would do the calculation (for simplicity we used the 2018 brackets):
Taxable Income (before gains): Wages $250,000 less standard deduction of $24,000 equals $226,000
Dividends: $0
Capital Gains: $300,000
Taxable income exceeds the 0% rate bracket for joint filers ($77,200 for 2018) before considering capital gains so none of the gains are taxed at 0%.
Since the 15% capital gain rate bracket is available until $479,000 then $253,000 of capital gain income can be taxed at 15%. How does that work? Simply subtract your other taxable income (per above) of $226,000 from the full rate bracket of $479,000. The difference is how much “room” is left in the 15% capital gain rate bracket.
So $253,000 of gains can be taxed at 15%.
The remaining gain of $47,000 ($300K total gain less $253K gain taxed at 15%) is taxed at 20%.
How can we do better?
One of the simplest planning methods is to split the gain into two years. How does this work?
If you sell half the stock in Year 1 – you will have only $150K of gain. This gain will not make it all the way to the 20% rate bracket and the entire gain will be taxed at 15%.
If you sell the other half of the stock in Year 2 – you will get to have another run at the 15% rate bracket. With only $150K of gains (assuming all other income is about the same), you’ll stay within the 15% rate bracket in year two.
The difference?
With planning: You pay $45,000 in capital gains taxes (not considering the NIIT) on your sale.
Without planning: You pay $47,350 in capital gains taxes (not considering the NIIT) on your sale.
Savings: $2,350
This example is minor and involves a modest amount of gain. However, the bigger the gain, the bigger the stakes. Splitting gain over multiple years is a tried and true method. Other planning options include netting and harvesting losses and structuring sales to coincide with other income and loss events. More advanced strategies like the 1031 exchange or qualified opportunity zone funds can also be considered. If you’re selling your primary residence, don’t forget about the primary residence gain exclusion.
Dividends taxed at long-term capital gains rates
Dividends that you receive from domestic corporations and “qualified foreign corporations” are taxed at the same rates that apply to the 20%/15%/0% group mentioned above. However, these dividends aren't actually part of that group, and aren't subject to the grouping and netting rules discussed above. The 3.8% tax on net investment income applies to dividends. With dividends, proper planning can also help keeping those taxed at the 0% or 15% rate. Some planning actions may be to consider the timing of capital transactions and dividend transactions.
Some other planning suggestions. Since losses can only be used against gains (or up to $3,000 additionally), in many cases, matching up gains and losses can save you taxes. For example, suppose you've already realized $20,000 in capital gains this year and are holding investments on which you've lost $20,000. If you sell the loss items before the end of the year, they will “absorb” the gains completely. If you wait to sell the loss items next year, you'll be fully taxed on this year's gains and will only be able to deduct $3,000 of your losses (if you have no other gains next year against which to net the losses).
Another technique is to seek to “isolate” short-term gains against long-term losses. For example, say you have $10,000 in short-term gains in Year 1 and $10,000 in long-term losses as well. You're in the highest tax bracket in all relevant years (assume that's a 37% bracket for Year 1). Your other investments have been held more than one year and have gone up $10,000 in value, but you haven't sold them. If you sell them in Year 1, they will be netted against the long-term losses and leave you short-term gains to be taxed at 37%. Alternatively, if you can hold off and sell them in Year 2 (assuming no other Year 2 transactions), the losses will “absorb” the short-term gains in Year 1. In Year 2, the long-term gains will then be taxed at only 20% (unless the gains belong in the 25% or 28% group).
Alternative minimum tax. The favorable rates that apply to long-term capital gain (and qualified dividend income) for regular tax purposes also apply for alternative minimum tax (AMT) purposes. In spite of this, any long-term capital gains you recognize in a year might trigger an AMT liability. This can happen if the capital gains increase your total income enough so that your AMT exemption phases out. The extra income from capital gains may also affect your entitlement to various exemptions, deductions, and credits, and the amounts of those AMT preferences and adjustments, that depend on the amount of your income.
Want to learn more about planning for capital transactions and accessing the preferential rates? Please contact us by submitting the form on our site or give us a call at 617 651 0531.
2019 Year-End Tax Planning
As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Year-end planning for 2019 takes place against the backdrop of the landmark Tax Cuts and Jobs Act (TCJA) changes that many individuals and businesses still haven't fully absorbed. For individuals, these changes include lower income tax rates, a boosted standard deduction, severely limited itemized deductions, no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT). 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.
Year-End Tax Planning Moves for Individuals
- Higher-income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.
- The 0.9% additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of a threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he or she would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000.
- Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that it, when added to regular taxable income, is not more than the “maximum zero rate amount” (e.g., $78,750 for a married couple). If the 0% rate applies to long-term capital gains you took earlier this year—for example, you are a joint filer who made a profit of $5,000 on the sale of stock bought in 2009, and other taxable income for 2019 is $70,000—then before year-end, try not to sell assets yielding a capital loss because the first $5,000 of such losses won't yield a benefit this year. And if you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains sheltered by the 0% rate.
- Postpone income until 2020 and accelerate deductions into 2019 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2019 that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2019. For example, that may be the case where a person will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or expects to be in a higher tax bracket next year.
- If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA in 2019 if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2019, and possibly reduce tax breaks geared to AGI (or modified AGI).
- It may be advantageous to try to arrange with your employer to defer, until early 2020, a bonus that may be coming your way. This could cut as well as defer your tax.
- Many taxpayers won't be able to itemize because of the high basic standard deduction amounts that apply for 2019 ($24,400 for joint filers, $12,200 for singles and for marrieds filing separately, $18,350 for heads of household), and because many itemized deductions have been reduced or abolished. No more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (e.g., tax preparation fees and unreimbursed employee expenses) are not deductible; and personal casualty and theft losses are deductible only if they're attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met. You can still itemize medical expenses but only to the extent they exceed 10% of your adjusted gross income, state and local taxes up to $10,000, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt, but payments of those items won't save taxes if they don't cumulatively exceed the standard deduction amount that applies to your filing status.
Some taxpayers may be able to work around these deduction restrictions by applying a “bunching strategy” to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer will benefit by making two years' worth of charitable contributions this year, instead of spreading out donations over 2019 and 2020.
- Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2019 deductions even if you don't pay your credit card bill until after the end of the year.
- If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2019, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2019. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not a good one to the extent it causes your 2019 state and local tax payments to exceed $10,000.
- Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70½. (That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire.) Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Thus, if you turn age 70½ in 2019, you can delay the first required distribution to 2020, but if you do, you will have to take a double distribution in 2020—the amount required for 2019 plus the amount required for 2020. Think twice before delaying 2019 distributions to 2020, as bunching income into 2020 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2020 if you will be in a substantially lower bracket that year.
- If you are age 70½ or older by the end of 2019, have traditional IRAs, and particularly if you can't itemize your deductions, consider making 2019 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. But the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, which can result in tax savings.
- If you are younger than age 70½ at the end of 2019, you anticipate that in the year that you turn 70½ and/or in later years you will not itemize your deductions, and you don't have any traditional IRAs, establish and contribute as much as you can to one or more traditional IRAs in 2019. If these circumstances apply to you, except that you already have one or more traditional IRAs, make maximum contributions to one or more traditional IRAs in 2019. Then, when you reach age 70½, make your charitable donations by way of qualified charitable distributions from your IRA. Doing all of this will allow you to, in effect, convert nondeductible charitable contributions that you make in the year you turn 70½ and later years, into deductible-in-2019 IRA contributions and reductions of gross income from age 70½ and later year distributions from the IRAs.
- Take an eligible rollover distribution from a qualified retirement plan before the end of 2019 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2019. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2019, but the withheld tax will be applied pro rata over the full 2019 tax year to reduce previous underpayments of estimated tax.
- Consider increasing the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.
- If you become eligible in December of 2019 to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for 2019.
- Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2019 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
- If you were in federally declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, keep in mind you can choose to claim them either on the return for the year the loss occurred (in this instance, the 2019 return normally filed next year), or on the return for the prior year (2018).
- If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in 2019 in order to maximize your casualty loss deduction this year.
Year-End Tax-Planning Moves for Businesses & Business Owners
- Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2019, if taxable income exceeds $321,400 for a married couple filing jointly, $160,700 for singles and heads of household, and $160,725 for marrieds filing separately, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in–for example, the phase-in applies to joint filers with taxable income between $321,400 and $421,400 and to single taxpayers with taxable income between $160,700 and $210,700.
Taxpayers may be able to achieve significant savings with respect to this deduction, by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2019. Depending on their business model, taxpayers also may be able increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so don't make a move in this area without consulting your tax adviser.
- More “small businesses” are able to use the cash (as opposed to accrual) method of accounting in than were allowed to do so in earlier years. To qualify as a “small business” a taxpayer must, among other things, satisfy a gross receipts test. For 2019, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts don't exceed $26 million (the dollar amount was $25 million for 2018, and for earlier years it was $5 million). Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.
- Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2019, the expensing limit is $1,020,000, and the investment ceiling limit is $2,550,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for qualified improvement property (generally, any interior improvement to a building's interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2019, rather than at the beginning of 2020, can result in a full expensing deduction for 2019.
- Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment—bought used (with some exceptions) or new—if purchased and placed in service this year. The 100% write off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year writeoff is available even if qualifying assets are in service for only a few days in 2019.
- Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, consider purchasing such qualifying items before the end of 2019.
- A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2019 (and substantial net income in 2020) may find it worthwhile to accelerate just enough of its 2020 income (or to defer just enough of its 2019 deductions) to create a small amount of net income for 2019. This will permit the corporation to base its 2020 estimated tax installments on the relatively small amount of income shown on its 2019 return, rather than having to pay estimated taxes based on 100% of its much larger 2020 taxable income.
- To reduce 2019 taxable income, consider deferring a debt-cancellation event until 2020.
- To reduce 2019 taxable income, consider disposing of a passive activity in 2019 if doing so will allow you to deduct suspended passive activity losses.