In your year-end business review, don’t forget new tax law implications
As we enter the fourth and final quarter of 2019, it’s time to analyze how your business performed—financially and otherwise. Now is a good time to take stock of assets and liabilities, campaigns and plans, and your next move as you gear up for the next year.
In 2019, there were several changes to tax law that went into effect. And, while tax season might seem far way, the fourth quarter is an excellent time to revisit the tax law changes and make any final business decisions before the year is over. Below are some key changes to consider:
Small businesses and the self-employed: Qualified business income deduction for pass-through entities
The new tax law introduced a deduction applicable to sole proprietorships, partnerships and S corporations—and limited liability companies that are treated as one of those entities. If you have qualified income from an active trade or business‡, up to 20% of that income may be deductible. This deduction is geared toward business owners with a total taxable income of $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers.
If your income exceeds those amounts, rules can get tricky, and are based on your business. With income over the limit, the deduction is subject to a cap based on the amount of W-2 wages paid by the business and the basis of certain property held by the trade or business, provided that the business is not a specified service trade or business.
Documenting family leave credit
If you have a plan that provides at least 50% of a qualified employee’s wages‡ during family and medical leave (FMLA), be sure that the plan is in writing. There was a tax credit established in 2019 for employers who provide paid FMLA to their employees, but only for leave taken after the written policy is in place. The credit amount is between 12.5% and 25% of eligible wages paid while a qualifying employee is on FMLA.
In addition, the plan must be available only for FMLA purposes, and cannot be used for other reasons. A written policy will be deemed to be in place as of the effective date so long it is adopted on or before Dec. 31, 2019 and the company brings its leave practices into compliance with the terms of the full period it covers, including making any retroactive leave payments no later than the last day of the tax year. In addition, paid leave under a short-term disability program may qualify if it meets all the relevant requirements.
Consider using your new equipment: increase to depreciation expensing
Consider putting new equipment into service before the end of the year. The new tax law temporarily increased bonus depreciation percentage‡ from 50% to 100% for certain property acquired and placed in service between Sept. 27, 2017 and Jan. 1, 2023. It also increased the maximum deduction for certain tangible, depreciable property or computer software.
To be eligible, this property must be used for the active conduct of trade of business (known as Section 179 property‡), and the purchase price must equal to or less than $1 million. Section 179 lets a trade or business immediately take a tax deduction of the cost of the property in the year it is bought, rather than capitalize that cost and then depreciate it over time.
Also, if you purchased a new building or did a major renovation, you should consider a cost segregation study‡. This can move some of the items that are part of the project from a 39-year depreciation schedule to 15, 7 or 5-year classes, accelerating deductibility for these items.
Time to adjust expense reimbursement policies? Changes to work-related expenses
Employees can no longer deduct unreimbursed work expenses, as they are classified as Miscellaneous Itemized Deductions‡. Since the new tax law removed the ability to deduct these, you may want to re-examine your expense reimbursement policies. In addition, entertainment expenses are no longer deductible at a corporate level. As a result, you should consider tracking meal reimbursement and entertainment expenses in separate accounts to preserve the remaining deduction.
Could a tax classification change help your business?
The new tax law lowered the corporate tax rate‡ from a series of brackets with a top tax rate of 35% to a single bracket with a flat 21% tax rate. It may be a good time to see if a change in tax classification to a C corporation would make sense and potentially save taxes.
The new tax laws in 2019 have brought several significant changes to how businesses approach taxes. If you think you will be impacted, speak with your legal or tax advisor. Taking the time to revisit these changes at year-end will better prepare you for filing next spring and help you decide if you need to act now.
Additional articles that can help you as we close out the year include an economic update from UMB Chief Investment Officer KC Mathews, tips from Brian Hutchin, director of corporate, treasury and card sales, on how to prevent fraud at your business, and exciting updates on the future of business payments from Uma Wilson, director of product management.
Interested in learning more about UMB Business Banking? See what we mean when we say, “Grow with Confidence.”
This post is informational only and does not constitute legal or tax advice. For all the items discussed in this post, it is best to consult your own legal or tax advisor who knows your specific situation and can advise you accordingly.