2019 Year-End Tax Planning for Businesses
As we are approaching the year-end, implementing strategic tax planning now is key to lowering tax liability that businesses will be soon paying. Here are some key planning opportunities and considerations businesses should look into:
- GILTI & FDII – The 2017 tax reform introduced several international tax rules which may impact the international businesses. GILTI (Global-Intangible Low Tax Income) taxes U.S. shareholders of controlled foreign subsidiaries on income earned by the subsidiaries. FDII (Foreign-Derived Intangible Income) provides a deduction for certain U.S. corporations with certain types of foreign source income. Businesses should consult with their tax advisors to identify ways to minimize the tax impact of GILTI and consider the potential tax benefit of FDII.
- 199A Deduction – The section 199A deduction, otherwise known as Qualifying Business Income Deduction, may reduce business income of individuals, including pass-through income, up to 20%. The rule provides complex qualification criteria and limitations, and documentation requirement in the case of pass-through income. Therefore, we recommend that the individual taxpayers with business and pass-through income should consult with their tax advisor before the year end to do planning in advance.
- Interest Deduction Limitation – Section 163(j) imposes a significant limitation on ability to deduct business interest. In nutshell, the section 163(j) limits interest deduction to 30% of business taxable income before interest deduction, depreciation, amortization and taxes. Highly debt-financed businesses may be subject to substantial limitation if a proper planning is not done in a timely manner.
- Bonus Depreciation- Expanded bonus depreciation rules allow taxpayers full expensing of both new and used qualifying property placed in service before 2023, creating significant incentives for making new investments in depreciable tangible property and computer software. Bonus depreciation allowances increased from 50 to 100 percent for qualified property acquired and placed in service after September 27, 2017, and before 2023 (January 1, 2024, for longer production period property and certain aircraft). Plan purchases of eligible property to assure maximum use of this annual asset expense election and bonus depreciation, as the 100-percent bonus depreciation deduction ends after 2023.
- Excess Business Loss Limitation - Non-corporate taxpayers are now subject to a new limitation on the deductibility of business losses from pass-through entities (such as partnership, S-corporation and sole-proprietorship). A taxpayer’s loss from trade or business in total is now limited to $500,000 for joint filers (or $250,000 for single filer) for the tax years 2018 through 2026. Disallowed excess business losses will be treated as net operating loss and carried forward. Year-end tax planning is crucial for individuals with business(es) expect to generate loss for the year.
- Rethink Entity Choice - With the reduced corporate income tax rate, to a flat 21%, and the 20% deduction allowed to a qualified business income from pass-through entities (such as S-corporation, partnership and sole-proprietorship), choosing an entity type for a business is less obvious from tax perspective. Provided that a business you own through a pass-thru entity qualifies for the 20% qualified business income deduction, your effective tax rate is reduced from 37% to 29.6% on the business income. In contrast, if your business is held under a C-corporation, the income would be subject to 21% corporate tax and the after-tax income would be subject to 20% dividend tax. This effectively yields 37 tax rate in total. The rate difference of structing business under pass-through or C-corporation became insignificant, and one needs to consider other factors in deciding to invest or operate through a corporate or pass-through entity.
- Multi-State Tax Filing Requirement – Following the Wayfair decision, many states have adopted “economic” presence nexus standard to determine filing requirements in states and localities for businesses with multistate footprints. Multistate businesses should perform an in-depth analysis to determine filing requirements in states, and consider compliance and payment obligations in advance.
We advise taxpayers to do a comprehensive year-end tax planning, considering all opportunities and updates, to assess their impact and develop tax planning strategies in advance. Additional considerations can addressed in our newsletter – Year-End Tax Planning For High Net Worth Individuals http://www.kyjcpa.com/news-updates/year-end-tax-planning-for-high-net-worth-individuals/