Year-end planning for 2020 takes place against the backdrop of a turbulent year for businesses. The following is a continuation of our previous blog post for a brief overview of many year-end tax saving strategies.
Equipment and Office Furniture Purchases
If you buy new or used equipment/furniture for your business or make certain improvements to property and place these assets into service before the end of year, you could be entitled to a federal tax deduction of up to $1.04 million of the costs associated with these purchases/improvements under the Section 179 provisions. The TCJA expanded the definition of section 179 property to include qualified improvements to nonresidential real property, which means certain improvements to a building’s interior and for improvements such as roofs, HVACs, fire protection systems, alarm systems and security systems now qualify for the deduction. Additionally, most types of equipment and many interior building and leasehold improvements may be eligible for 100% Bonus Depreciation at the federal level. Vermont does not allow for bonus depreciation, meaning that in some cases, there may be differences between federal and state taxable income when bonus depreciation is elected. The deduction are available for new or used equipment purchased or financed and placed into service before December 31, 2020. For further details you can also visit https://www.section179.org/
Accelerate or Defer Income
Cash-method businesses that want to defer incomes should consider delaying the sending of late-in-the-year invoices, so payment is not received until 2021. In addition, pay as many expenses as feasible by year-end to get the deduction in 2020. Credit cards are considered the same as checks. Accrual-method businesses wanting to defer income should, if possible, hold off on providing goods or services to customers and billing them until after January 1. In some cases, depending on your business’ bottom line, it may make sense to accelerate income into 2020 or defer expenses to 2021.
Deductions on bonuses for Accrual Basis Businesses
An accrual basis C-corporation can take a 2020 deduction for a bonus not actually paid to its employee until the following tax year if (1) the employee doesn’t own more than 50% in value of the corporation’s stock, (2) the bonus is properly accrued on its books before the end of the current tax year, and (3) the bonus is actually paid within the first 2 ½ months of the following year (for a calendar year taxpayer, within the first 2 ½ months of 2021). For employees who are on the cash basis (for income that was deferred before it was earned), the bonus won’t be taxable income until the following year.
Year End Bonuses for Owners
Increasing compensation for a business owner through the payment of a year-end bonus is something to consider as a way to help maximize QBID deductions, maximize various tax credits linked to compensation levels, catch up on withholdings for the year to reduce or even eliminate underpayment penalties, and maximize retirement contributions. Deductions won’t be allowed for bonuses to an owner-employee unless paid out by December 31, 2020.
Solar Investment Tax Credit
For 2020, federal law allows a 26% tax credit for solar systems on residential and commercial properties. The credit is reduced to 22% for projects that commence construction in 2021. If your business solar project is eligible and receives the federal tax credit you can also receive the Vermont tax credit. The current credit amount is 24% of the investment tax credit attributable to the Vermont-property portion of the investment.
This is intended to give you ideas to get you planning for 2020. Please call us to schedule a tax planning strategy session so we can discuss your situation in detail and see how these and other planning ideas can be used to reduce your tax bill.
Tax planning in 2020 is complex and made even more so with the pandemic. Avoid any surprises next April 15th and be proactive in your tax strategizing. Davis & Hodgdon Associates CPAs has been assisting individuals and businesses throughout Vermont and New England for more than 30 years so please reach out to us in Williston 802-536-1698) or Rutland (802.775.7132) to schedule a strategy session today! You can also email us at [email protected].