tax planning for business: what you need to know for 2020 By: Salvatore schibell, lawson, rescinio, schibell & associates
Following the passing of the Tax Cuts and Jobs Act in December 2017 (TCJA), which was the most significant set of changes to the U.S. tax code in 30 years, 2019 is a relatively stable year for tax changes. The large majority of the TCJA changes went into effect for the 2018 tax year. To recap, the TCJA legislation cut the top corporate tax rate to 21%, lowered the top marginal rate for individual taxpayers to 37%, eliminated or scaled back several deductions, reduced taxes on business income earned by passthrough businesses, doubled the estate tax exemption, and enhanced immediate expensing of capital investments. Apart from these changes introduced in 2018, here are some 2019 highlights: Individual Highlight There continue to be seven tax brackets in 2019; a change from five was made in 2018. For individuals, the top tax rate of 37% applies to those with taxable income of $510,301 in 2019, up from $500,001 in 2018, to $612,351 in 2019, up from $600,001 in 2018. Standard deduction for heads of household will increase by $350 to $18,350 in 2019. Estates will have an exemption of $11,400,000 in 2019, up $220,000 from 2018. In 2019, the maximum amount workers can contribute to their 401(k) rose $500 from 2018. The amount is $19,000 ($25,000 for workers over age 50 in 2019). IRA amounts rose $500 to $6,000 ($7,000 for those over age 50). Given the changing nature of tax law and the complexity of our tax rules, planning is essential. The purpose of this article is to provide the reader with a broad overview of important tax issues affecting businesses in a manner not too overburdened with the details of the law. Section 199A Business Deduction The new Section 199A permits individuals, trusts, and estates to deduct up to 20% of their “qualified business income” from a partnership, S corporation, or sole proprietorship (including disregarded entity) as well as some other pass-through entities. For each qualified trade or business, the 20% deduction cannot exceed the greater of (a) 50% of the W2 wages paid by the qualified business, or (b) 25% of wages paid and 2.5% of the unadjusted basis immediately after acquisition of the qualified property of the business. Qualified property is generally depreciable tangible property held by a qualified trade or business or used in the production of qualified business income and for which the
depreciation period has not expired (or in the case of short lived property, before the 10-year anniversary of its being first placed in service by the taxpayer). Further, the deduction is limited for any “specified service business” or any trade or business of performing services as an employee. A specified service business generally is any business involving the performance of services in the fields of health, law, accounting, actuarial sciences, performing arts, consulting, athletics, financial services, brokerage services, or where the principal asset of such trade or business is the reputation or skill of one or more employees or owners. Only income that is considered effectively connected with the conduct of a trade or business within the United States is eligible to be treated as qualified business income. Capital gain or loss items, dividends, interest, and certain other investment type items are also excluded from the definition of qualified business income. For service businesses, the determination for the 20% deduction is made by taking into consideration the taxable income limits of the individual owner. New Limitation on Excess Business Losses
Accounting Corner
The Current Tax Climate
Noncorporate Taxpayers and Individuals For tax years beginning after December 31, 2017 and before January 1, 2025, the Act provides that a noncorporate taxpayer's "excess business loss" is disallowed. Under the new rule, excess business losses are not allowed for the tax year but are instead carried forward and treated as part of the taxpayer's net operating loss (NOL) carryforward in subsequent tax years. An excess business loss for the tax year is the excess of aggregate deductions of the taxpayer attributable to the taxpayer's trades and businesses over a threshold amount. The threshold amount for a tax year is $510,000 for married individuals filing jointly and $255,000 for other individuals with both amounts indexed for inflation; e.g. if the combined business losses for a year exceed $510,000 relating to married individual filings, the excess will be carried forward to future tax years and applied against business income. In the case of a partnership or S corporation, the provision applies at the partner or shareholder level. Benefiting from Business Losses If your business has suffered losses, make sure you take advantage of every allowable deduction. Net operating losses (NOLs) are generated when a company’s deductions for the tax year are more than its income. Under old law, NOLs could be carried
Utility & Transportation Contractor | february| 2020 19
