Year-End Planning Guide
December 09, 2019
In this installment of “The Bottom Line,” EisnerAmper business consultant Tim Schuster offers company owners a few proactive things to think about as we approach the end of 2019. He covers taxes, budgeting, business structure and more.
DP: Yeah, great to see you. Tim, now that we have some lessons learned from this past tax season under our belt, I thought this would be a good time to discuss some year-end planning matters. What should businesses be thinking about now?
TS: Yeah, no, absolutely. One of the things to keep in mind is depending upon your entity structure, and just to reiterate to our listeners today, you know C-Corp's now are flat 21% so that's relatively straightforward, but flow through companies can qualify for what's called qualified business income deduction. Right? And what is that? It's meant for S corporations, limited liability companies, partnerships and sole proprietorship or just any sort of flow through entity. It's taken at the individual level, not the entity level, regardless of whether you itemize. That's very key.
This deduction is calculated at 20% of trade business income of these entities. There are limitations based on owner's taxable income, W-2 salaries of the business and whether or not the business is a service or not service business.
TS: This is probably the most complicated portion of the new tax law. Business owners who might be able to take advantage of this, should be speaking to their tax advisors immediately. There are some tax strategies and planning moves that could be considered now and may not be available if you'll wait until the end of the year. A matter that kind of came to mind during our past busy season is reviewing payroll. Depending upon the situation and entity structure, specifically S corporations, it may not make sense to run all shareholders payroll through compensation. By switching that up, an owner can save on self-employment taxes.
DP:Okay. It sounds like we're still unpacking some stuff from the tax cuts and jobs act.
Tim Schuster: Correct. Exactly.
DP:What else? Give us some more. That was great, but give us some more what a company should be considering.
TS: No, of course. In a prior podcast, we discussed comparing budget first actual and what happens a lot during Q4 is purchases of fixed assets. The new depreciation rules will be favorable until at least 2022. Right now, 100% bonus depreciation is back. After 2022, bonus depreciation is scaled back by 20% each year. This break on bonus depreciation is applied to assets with the useful life of 20 years or less, and the asset can be new or used and that's massive. Section 179 also saw an increase as well up to $1 million in this limitation phases out dollar for dollar once you hit 2.5 million of qualified purchases.
DP:Okay. Now flow through though is big and it has wide ranging consequences. What other flow through tax issues are there?
TS: Sure. I would be remiss not to mention a few of those, and one that impact that a lot of taxpayers this year was interest expense limitations or 163-J. As a reminder, the tax law change impacts primarily those taxpayers who average gross receipts are greater than 25 million for the proceeding past three years. This gross receipt figure is assessed every year on a rolling three-year basis. If a business meets the above criteria for most of this means that net business interest expense or interest expense less interest income in excess of 30% of the taxpayer's adjusted taxable income will not be deductible.
Adjusted taxable income will be defined for the next few years as earnings before interest, taxes and depreciation amortization or more commonly EBITA. After that, adjusted taxable income will be defined as earnings before interest in taxes or EBIT. This has caused a lot of issues as interest expense has been limited in many taxpayers instances. However, you can carry forward those nondeductible expenses and take them in future years.
There is an opt-out to this and it's best to discuss with your accountant what those options are. The same is true with loss limitations from flow through entities. Some of these can be used to offset against other income. To really hit this home, taxpayers with flow through entities really need to work with a tax preparer when faced with these issues.
DP:Okay. Now, it sounds like there's a lot of moving pieces here and that's why it's so great that companies can get, need to get a qualified business advisor to kind of wade through this. But for our listeners, put a bow on it for us. What's the takeaway here? What does this all mean?
TS: Sure. Honestly, discuss, discuss, discuss. This podcast barely scratched the surface for year-end planning, right? I mean, really we talked about just a high level things, but the game has changed dramatically when it comes to taxes. Depending upon your industry, it'll change how planning will be handled. The earlier the discussion has had with your accountant, the easier it is to implement any changes. You want to make sure you discuss company strategy with your accountant during these year-end meetings. A lot of businesses will begin transition phases soon. You'll call it the great transfer where baby boomers will be retiring and the greatest transfer of wealth will occur. Someone like myself, honestly, we can help with these conversations.
DP:Good to know. Let's lighten it up a little bit. Change gears. Let's talk about one of your New Jersey historical society fun facts.
TS: Yeah, of course. This fact is another odd one and it's a little bit ironic. It's not specific to New Jersey. However, Henry Clay, the great compromiser of the 1800s was selected as speaker of the house on his very first day as a Congressman. Can you imagine that happening today?
DP:Yeah, I did not know that and I did not know that that could happen.
TS: Yeah, right. Exactly.
DP: Well, Tim, thanks again for this valuable information.
TS: Of course.
DP: And thank you for listening to the Bottom Line, as part of the EisnerAmper podcast series. Visit EisnerAmper.com for more information on this and a host of other topics, and join us for our next EisnerAmper podcast when we get down to business.