Accounting Corner

tax planning for business: what you need to know for 2020 By: Salvatore schibell, lawson, rescinio, schibell & associates

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 Noncorporate Taxpayers and Individuals The Current Tax Climate 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 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

back two years to obtain a refund and then carried forward for up to 20 years, or you could elect out of the carryback. Under the Tax Cuts and Jobs Act of 2017, carrybacks of NOLs are no longer allowed, but an indefinite carryforward of NOLs is allowed. The new tax law also sets a limit on the amount of NOLs that a company can deduct in a year equal to the lesser of the available NOL carryover or 80% of a taxpayers’ pre-NOL deduction taxable income. Corporate capital losses (C Corp) are also currently deductible, but only to the extent of capital gains. A three-year carryback and a five-year carryforward period apply. If your business operates as a partnership, S corporation, or LLC, you may deduct business losses on your personal tax return. Losses may be limited because of the at-risk or passive activity loss rules. Keep in mind that you can only deduct your share of losses to the extent that you have sufficient income tax basis for your investment. Also, take advantage of other possible loss deductions. You may deduct all or some bad business debts as ordinary losses when your good-faith collection efforts are unsuccessful. Inventory losses, casualty and theft losses (to the extent they are not covered by insurance), and losses from a sale of business assets may also be deductible.

Enhanced Business Asset Expensing Rules

Increased Code Section 179 (Expensing business acquisition write-off) in a trade or business to qualify for the write-off. Bonus depreciation phases down commencing after December 31, 2022 and sunsetting after 2026.

Bonus depreciation, as prior law allowed, may not be used to expense qualified nonresidential real property formerly defined as qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.

Luxury Automobile Depreciation Limits Increased

For passenger automobiles placed in service after December 31, 2017, in tax years ending after that date, for which the additional first-year depreciation deduction is not claimed, the maximum amount of allowable depreciation is increased to $10,100 for the year in which the vehicle is placed in service, $16,100 for the second year, $9,700 for the third year, and $5,760 for the fourth and later years in the recovery period. For passenger automobiles placed in service after 2019, these dollar limits are indexed for inflation. For passenger autos eligible for bonus first-year depreciation, the maximum first-year depreciation allowance relating to the Bonus depreciation element remains at $8,000, resulting in an increase from $10,100 to $18,100 for first-year depreciation. In addition, computer or peripheral equipment is removed from the definition of listed property, and so isn't subject to the heightened substantiation requirements that apply to listed property.

For property placed in service in tax years beginning after December 31, 2017, the maximum amount a taxpayer may expense under (Code Sec. 179) is increased to $1.2 million for 2019, and the investment phase-out threshold amount is increased to $2.55 million for assets acquired in excess of this amount. For tax years beginning after 2019, these amounts (as well as the $25,000 sport utility vehicle limitation) are indexed for inflation. Qualified Real Property The definition of (Code Sec. 179) property is expanded to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. The definition of qualified real property eligible for (Code Sec. 179) expensing is also expanded to include the following improvements to nonresidential real property after the date such property was first placed in service: roofs, heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems and including, as in prior law, leasehold improvements. Section 179 property generally is new or used tangible personal property plus qualified real property. 100% Cost Recovery of Qualifying Business Assets (Bonus Depreciation)

Under the new law, 100% first-year deduction for the adjusted basis is allowed for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. The additional first-year depreciation deduction is allowed for new and used property. Note prior to the law change Bonus Depreciation was only applied to new property acquisitions. Qualified property is basically defined the same as Code Section 179 property as explained above. Bonus depreciation may be used for assets that are not considered used in a trade or business, (i.e., real estate), as opposed to Section 179 assets that must be used

Limits on Deduction of Business Interest

For tax years beginning after December 31, 2017, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business's adjusted taxable income. The net interest expense disallowance is determined at the tax filer level. However, a special rule applies to pass-through entitles, which requires the determination to be made at the entity level, for example, at the partnership level instead of the partner level.

For tax years beginning after December 31, 2017 and before January 1, 2022, adjusted taxable income is computed without regard to deductions allowable for depreciation, amortization, or depletion and without the former Code Sec. 199 deduction (which is repealed effective December 31, 2017).

An exemption from these rules applies for taxpayers (other than tax shelters) with average annual gross receipts for the three-tax year period ending with the prior taxable year that do not exceed

Accounting for Long-Term Contracts For contracts entered into after December 31, 2017, in tax years ending after that date, the exception for small construction contracts from the requirement to use the Percentage of Completion Method of revenue recognition (PCM) is expanded to apply to contracts for the construction or improvement of real property if the contract: (1) is expected (at the time such contract is entered into) to be completed within two years of commencement of the contract and (2) is performed by a taxpayer who (for the tax year in which the contract was entered into) meets the $25 million gross receipts test.

Cost Segregation Studies Capital cost segregation is a comprehensive study of real property to maximize allowable tax depreciation through faster cost recovery. Generally, real estate improvements must be depreciated over 27.5 or 39 years using a straight-line method. A cost segregation analysis identifies property components and related costs that Federal tax law allows to be depreciated over five or seven years using 200% of the straight-line rate or over fifteen years using 150% of the straight-line rate. Under these rules, it is possible to increase your allowable first-year depreciation tenfold. The Tax Cuts and Jobs Act of 2017 expanded the ability to expense qualifying property immediately. Qualifying assets placed in service between September 27, 2017 and December 31, 2022 are eligible for immediate expensing. After 2022, the deduction phases out by 20% each year. Examples of assets that may need proper classification include landscaping, site fencing, parking lots, decorative fixtures, cabinets, and security equipment. NOTE: The rules differ for certain property types, and not all states follow Federal depreciation rules. Businesses subject to the Alternative Minimum Tax (AMT) may derive less benefit from cost segregation. Deductions for Meals, Entertainment, and Transportation Costs The Tax Cuts and Jobs Act of 2017 has changed the way businesses handle meals, entertainment and transportation expenses from a tax perspective. Meals Meal expenses associated with operating a business, including meals during employee travel, remain deductible subject to the 50 percent limitation. The cost of a client dinner, as long as it is not extravagant, is still allowed under the 50 percent deduction rule. Documentation of the business purpose of the meal is necessary for deductibility. The recently changed tax law extends the 50 percent deduction limit to employer-operated eating facilities through 2025. After 2025, employer-operated eating facilities become non-deductible. Entertainment The law eliminates deductions for entertainment even if it is directly related to the conduct of business. $25 million. Real property trades or businesses can elect out of the provision if they use the ADS depreciation convention to depreciate applicable real property used in a trade or business. An exception from the limitation on the business interest deduction is also provided for floor plan financing (i.e., financing for the acquisition of motor vehicles, boats, or farm machinery for sale or lease and secured by such inventory). Tax Accounting Issues

Taxable Year of Inclusion Generally, for tax years beginning after December 31, 2017, a taxpayer is required to recognize income no later than the tax year in which such income is considered as income on an applicable financial statement (AFS) or another financial statement under rules specified by the IRS [subject to an exception for long-term contract income under (Code Sec. 460)]. The Act also codifies the current deferral method of accounting for advance payments for goods and services to allow taxpayers to defer the inclusion of income associated with certain advance payments to the end of the tax year following the tax year of receipt if such income is also deferred for financial statement purposes.

Cash Method of Accounting For tax years beginning after December 31, 2017, the cash method may be used by taxpayers (other than tax shelters) that satisfy a $25 million gross receipts test, regardless of whether the purchase, production, or sale of merchandise is an income-producing factor. Under the gross receipts test, taxpayers with annual average gross receipts that do not exceed $25 million (indexed for inflation for tax years beginning after Dec. 31, 2018) for the three prior tax years can use the cash method. Qualified personal service corporations, partnerships without C corporation partners, S corporations, and other pass-through entities can use the cash method without regard to whether they meet the $25 million gross receipts test, so long as the use of the method clearly reflects income. Accounting for Inventories For tax years beginning after December 31, 2017, taxpayers that meet the $25 million gross receipts can account for inventories by either (1) treating inventories as non-¬incidental materials and supplies, or (2) conforming to the taxpayer's financial accounting treatment of inventories. Treating inventories as non-incidental materials requires capitalizing the inventory items, materials, and expensing the costs when the items are used or sold. Capitalization and Inclusion of Certain Expenses in Inventory For tax years beginning after December 31, 2017, any producer or re-seller that meets the $25 million gross receipts test is exempted from the application of Uniform Capitalization rules (UNCAP), capitalizing general and administrative expenses into inventory. The exemptions from the UNCAP rules that are not based on a taxpayer's gross receipts are retained.

The recent tax law changes also eliminated deductions for qualified transportation fringe benefits and certain expenses to provide commuting transportation to employees. The cost of providing employees’ transit passes or parking is no longer allowed as a deduction to the employer. In addition, the costs associated with providing transportation for an employee’s commute to work are not deductible unless necessary to ensure an employee’s safety. Business-related travel expenses are still deductible under the new law. This includes business travel between job sites, travel to a temporary assignment (generally one year or less) that is outside your general area of residence, travel between primary and secondary jobs, and all other cab, bus, train, airline, and automobile expenses. Any regular commuting expenses to your primary job cannot be deducted. The Tax Cuts and Jobs Act changed the deductibility of unreimbursed employee expenses. Previously, if a taxpayer incurred business travel expenses that the company did not reimburse, they could deduct these on their individual income tax return (subject to limitations), but under the recent law changes this is no longer allowed.

To support business travel deductions, keep supporting documents for expenses. Document the following: date, place, amount, and business purpose of expenditures; name and business affiliation or business purpose of trip; and in the case of meals, all of the above must directly precede or follow a substantial business discussion associated with your business. Be sure to keep personal expenses separate from business expenses.

Expense reimbursement plans

Companies may institute “accountable” or “nonaccountable” expense reimbursement plans. Generally, accountable plans better serve both the employer and employee. Under accountable plans, employees submit mileage logs or actual expense receipts for which they are reimbursed at the standard mileage rate or for actual expenses. The company deducts the reimbursements in full, and employees do not report them as income or deduct related expenses.

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About the Author . . .Salvatore Schibell, CPA, CFP®, MS Taxation, MBA, CGMA, is the tax partner at Lawson, Rescinio, Schibell & Associates, P.C. One of his specialties is working with contractors to maximize profitability utilizing his vast experience and educational skills. Sal can be contacted at 732-539-7328.