Tax planning with year-end business decisions

As 2019 comes to a close, business owners should contemplate how to reduce tax liability through late-year elections and timing of revenue. Immediate expensing, accelerated bonus depreciation, deducting expenses and deferring income can help a business reduce tax liability on excess revenues generated during the 2019 tax year.

Utilizing expensing and depreciation in 2019

Section 179 deduction for 2019 allows a taxpayer to immediately expense up to $1 million in qualified property costs during the year, excluding any capitalized amounts. Section 179 expensing phases out dollar for dollar for qualified property (in the aggregate) in excess of $2.5 million, with expensing in excess of the income derived from the active trade or business of the taxpayer disallowed, and disallows expensing in excess of the income derived from the taxpayer’s active trade or business. Amounts disallowed due to this limit carryforward to the next year. Qualified property includes:

1) tangible personal property;
2) computer software;
3) qualified improvement property; and
4) some listed property.

Section 168 allows a taxpayer to take depreciation on qualified property until Jan. 1, 2023, equal to the “applicable percentage.” The applicable percentage is 100% and after Jan. 1, 2023, it decreases by 20% for each subsequent year. Notably, qualified property includes all property with a recovery period of under 20 years.

Section 179 is an opt-in and while Section 168 is opt-out, these sections apply in coordination with one another but the deductions do not overlap. A taxpayer may expense costs up to the limits imposed by Section 179 and take the bonus depreciations; however, bonus deprecation of the property is reduced by amounts expensed.

The Section 179 expensing election is made on a property-by-property basis while the Section 168 depreciation opt-out is made class-by-class. These tranches allow a taxpayer flexibility to offset current income through depreciations and expensing, or plan for future income through electing out and taking future depreciation deductions, or utilizing expiring carryforward losses or credits. Thus, to offset high revenue, a taxpayer may choose to make purchases of qualified property to increase deductions or expenses.

Timing late year revenue and expenses for cash-method taxpayers

For cash method taxpayers, income occurs on receipt of payment. Late year revenue attributed to accounts received may be deferred through late December billing. This will push receipt of payment into January 2020 and defer income into the 2020 fiscal year. Taxpayers should also consider charging reoccurring expenses at the end of 2019 rather than at the beginning of 2020 to increase business deductions even though the amounts will be paid in 2020.

Non-tax reminder: update employee manuals

Starting Jan. 1, 2020, recreational marijuana is legalized in Illinois. Employers should consider updating employee handbooks to account for this change. Onsite use, potential allowance or punishments, and procedures to follow if an employee is impaired, should all be discussed and put into writing. Please click here to view the recent Employment Focus newsletter for an in-depth analysis of employment law changes.

To ensure your business increases deductions and/or expenses for 2019, contact a Chuhak & Tecson business and tax attorney.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: William L. Ivey, Associate