Business InsightsTaxes
2020 has been a year of unprecedented challenges. As businesses continue to manage the impacts of COVID-19, many are also looking ahead to 2021, with uncertainty surrounding the public health crisis, a new administration taking office, and potential changes in tax policy.
Regardless of your business’s stage of recovery, now is the time to evaluate year-end strategies that may reduce tax liability and strengthen your position moving into the new year.
Strategic Considerations Based on Income Projections
Scenario 1: Income or Tax Rates Are Expected to Remain Constant or Decrease in 2021
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Defer Income
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Cash-basis taxpayers can delay billing into 2021.
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Accrual-basis taxpayers may take advantage of the Tax Cuts and Jobs Act (TCJA) provision allowing deferral of advance payments for up to one year if aligned with financial reporting.
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Accelerate Deductions
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Cash-basis businesses can pay 2020 expenses now.
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Accrual-basis businesses can leverage accounting strategies to recognize deductions in 2020.
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Expense Capital Assets
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Place eligible assets in service before year-end to take advantage of 100% bonus depreciation.
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Close on Taxable Acquisitions
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Closing deals in 2020 may allow for immediate expensing of tangible property included in the purchase.
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Scenario 2: Income or Tax Rates Are Expected to Increase in 2021
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Accelerate Income
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Cash-basis businesses recognize income upon receipt; accrual-basis businesses can complete work and bill clients now.
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Defer Expenses
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Delay asset purchases or expense recognition into 2021 when tax rates may be higher.
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Delay Business Acquisitions
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Consider waiting to finalize acquisitions until 2021 to maximize related deductions under higher anticipated rates.
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Additional Year-End Tax Planning Opportunities
Research & Development (R&D) Credit
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Consider accelerating R&D efforts before 2022, when amortization rules will begin to limit immediate deductions.
Section 199A Deduction
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Pass-through entities should evaluate W-2 wages and income thresholds to optimize the 20% qualified business income deduction.
Bonus Planning
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Accrual-basis corporations may deduct bonuses paid by March 15, 2021, if properly accrued in 2020 and employees do not own more than 50% of the company.
S Corporation Planning
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Shareholders may contribute capital or make loans to the business to increase basis and deduct current year losses.
Partnership Loss Deductions
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Basis can be increased by additional contributions or assuming partnership liabilities. Carefully manage liability allocations.
Distributions of Appreciated Property
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Delaying distributions until 2021 can defer capital gains tax recognition.
Business Interest Deduction
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The CARES Act increased the limitation from 30% to 50% of adjusted taxable income for 2019 and 2020. Consider how this may impact interest deductibility.
Section 382 Studies
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Certain restructuring techniques can increase net operating loss (NOL) usage limitations.
Entity Simplification or Restructuring
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May create loss deductions or enhance interest deductibility by combining closely held businesses or restructuring corporate groups.
Transaction Cost Analysis
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Evaluate capitalized deal costs for potential deduction or reclassification.
Qualified Small Business Stock (QSBS)
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Taxpayers may exclude gains on QSBS held for more than five years if the corporation and stock qualify under Section 1202.
IRS Account and Interest Recovery Services
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Identify IRS processing errors and recover interest to reduce year-end tax obligations.
Conclusion
While each business’s circumstances are unique, these strategies may help reduce tax liability and position you for a stronger financial year ahead. Consult with your tax advisor to determine which actions are best suited to your goals.
For personalized planning assistance, contact our office to schedule a year-end review.