A number of year-end tax planning strategies are available to business owners that can be used to reduce tax liability. Let”™s take a look:
Small business health care tax credit
Small-business employers with 25 or fewer full-time equivalent employees with average annual wages of $50,000 indexed for inflation (e.g., $55,000 in 2019) may qualify for a tax credit to help pay for employees”™ health insurance. The credit is 50 percent (35 percent for nonprofits).
Business energy investment tax credits
Business energy investment tax credits are still available for eligible systems placed in service on or before Dec. 31, 2022, and businesses that want to take advantage of these tax credits can still do so.
Business energy credits include geothermal electric, large wind (expires at the end of 2020), and solar energy systems used to generate electricity, to heat, cool, or to provide hot water for use in a structure, or to provide solar processed heat.
Hybrid solar lighting systems, which use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, are eligible; excluded, however, are passive solar and solar pool heating systems. Utilities are allowed to use the credits as well.
Repair regulations
Where possible, end of year repairs and expenses should be deducted immediately, rather than capitalized and depreciated. Small businesses lacking applicable financial statements (AFS) can take advantage of de minimis safe harbor by electing to deduct smaller purchases ($2,500 or less per purchase or invoice). Businesses with applicable financial statements can deduct $5,000. Small businesses with gross receipts of $10 million or less can also take advantage of safe harbor for repairs, maintenance, and improvements to eligible buildings. Please call if you would like more information on this topic.
Depreciation limitations on luxury, passenger automobiles and heavy vehicles
As a reminder, tax reform changed depreciation limits for luxury passenger vehicles placed in service after Dec. 31, 2017. If the taxpayer doesn’t claim bonus depreciation, the maximum allowable depreciation deduction for 2020 is $10,100 for the first year.
Deductions are based on a percentage of business use. A business owner whose business use of the vehicle is 100 percent can take a larger deduction than one whose business use of a car is only 50 percent.
For passenger autos eligible for the additional bonus first-year depreciation, the maximum first-year depreciation allowance remains at $8,000. It applies to new and used (“new to you”) vehicles acquired and placed in service after Sept. 27, 2017, and remains in effect for tax years through Dec. 31, 2022. When combined with the increased depreciation allowance above, the deduction amounts to as much as $18,100 in 2020.
Heavy vehicles including pickup trucks, vans, and SUVs whose gross vehicle weight rating (GVWR) is more than 6,000 pounds are treated as transportation equipment instead of passenger vehicles. As such, heavy vehicles (new or used) placed into service after Sept. 27, 2017, and before Jan. 1, 2023, qualify for a 100 percent first-year bonus depreciation deduction as well.
Retirement plans
Self-employed individuals who have not yet done so should set up self-employed retirement plans before the end of 2020. Call today if you need help setting up a retirement plan.
Dividend planning
Reduce accumulated corporate profits and earnings by issuing corporate dividends to shareholders.
Paid family and medical leave credit
Last chance to take advantage of the employer credit for paid family and medical leave, which expires at the end of 2020.
This column is for information only and should not be taken as advice. Taxes are complicated and mistakes can be costly. Consider consulting a tax professional for assistance.
Editor”™s note: The first part of this two-part column ran in the Nov. 16 edition.
Norm Grill (N.Grill@GRILL1.com) is managing partner of Grill & Partners LLC (www.GRILL1.com), certified public accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien, 203-254-3880.
