As the end of another year quickly approaches, now is the time to start considering some of the major tax implications that may affect your business. Proper tax planning can allow your business to postpone or even eliminate some of your 2019 tax liability. Below are some items that businesses can implement for 2019 and beyond.
Expanded Use of the Cash Method of Accounting for Small Business Taxpayers
The Tax Cuts and Jobs Act of 2017 (TCJA) increased the threshold for average gross receipts to $25 million for the three prior taxable years. This means that the cash method of accounting may be used by taxpayers that satisfy the small business taxpayer average gross receipts test. The cash method of accounting ensures that taxes are not paid on revenues that have not yet been received and that expenses are deducted when paid. This can help to aid in deferring revenue and, in turn, lower the taxable income of a business in a particular year.
Advantages of Accelerated Depreciation
The method of expensing assets used for tax purposes differs from those used on the financial statements, which can result in larger tax depreciation deductions earlier in an assets life. One common way to accelerate the depreciation of an asset, for tax purposes, is by expensing it under the IRC §179. This allows taxpayers to deduct the cost of certain property as an expense when the property is placed in service. For the 2019 tax year, the maximum amount of allowable §179 expense is $1,000,000 on qualified property that is placed in service during the year. However, there is a $2,500,000 phase-out threshold. If a business places qualified property in service during the year exceeding the $2,500,000 threshold, the amount of allowable §179 expense is phased out $1 for $1.
Similar to the §179 expense, businesses can also elect to take bonus depreciation on qualified assets placed in service during the year. For 2019, 100% of a qualified asset’s basis is allowed to be deducted as bonus depreciation on the tax return, no matter if the asset is new or used. Unlike the §179 deduction, there are no phase-out thresholds for the bonus depreciation deduction, which can make it even more appealing in some cases. The use of accelerated depreciation methods, like §179 and bonus, allow businesses to increase the deduction for depreciation. That, in turn, reduces the amount of income that is taxable, making depreciation an incredibly important part of tax planning for businesses.
Recent Developments in Depreciation
On September 11, 2019, the IRS approved final regulations that addressed a perceived drafting error in the TCJA. To taxpayers’ detriment, the regulations confirm that a change in legislation would be required to allow for bonus depreciation to be taken on qualified improvement property. No bonus depreciation can be taken on property improvements!
It is important to always take a big picture approach when tax planning. You may find it to be more beneficial to utilize certain methods and deductions in different years to end up in the most favorable tax position year to year. It is also important to consult with your tax advisor to determine the impact of different tax-planning strategies.
Nicholas L. Shires, CPA, is a tax partner with Dannible & McKee, LLP, a Syracuse, New York based public accounting firm. The firm has specialized in provided tax, audit and accounting service to the construction industry since its inception in 1978. For more information on this topic, you may contact Nick at (315) 472-9127 or visit online at www.dmcpas.com.