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Seven Year-End Tax Moves for Businesses

Salvage key tax breaks for 2020

This year has been a struggle for many small businesses. At least you may be able to reduce your tax liability through smart year-end tax planning, including several tax breaks included in the new Coronavirus Aid, Relief, and Economic Security (CARES) Act. Following are seven popular ideas to consider.

1. Business assets: If your business is ramping operations back up, you may need to acquire business assets. Thanks to the generous Section 179 deduction, as amended by the Tax Cuts and Jobs Act (TCJA) of 2017, your business can currently deduct the cost of up to $1 million of assets ($1.04 million in 2020) placed in service anytime during the year, subject to a phase-out threshold of $2.5 million ($2.59 million in 2020).

In addition, a business may be able to claim a first-year “bonus depreciation” deduction on any remaining cost. The bonus depreciation deduction, which was doubled from 50% to 100% by the TCJA, is scheduled to begin to phase out in 2023.

2. Business interest: Under the CARES Act, the annual deduction for the net interest of a business is limited to 50% of its income, up from 30%. But your small business may be eligible for an exception. The 50% net interest limit does not apply to a qualified small business with average gross receipts of $25 million or less ($26 million in 2020) for the three prior tax years. Your business might defer income to 2021 to qualify for the exception.

If the business interest deduction limit still applies to your business in 2020, the excess may be carried forward indefinitely until it is used up.

3. Payroll tax deferral: Is your business having trouble meeting its payroll tax obligations this year due to the pandemic? Under the CARES Act, an employer can defer payment of the 6.2% Social Security tax portion of payroll tax incurred for the period of March 27, 2020, through December 31, 2020. This can give you more cash flow flexibility.

Be aware that the deferral is temporary. An employer must pay half of the deferred amount by the end of 2021 and the other half by the end of 2022.

4. Cash accounting: Generally, small business owners prefer to use the simplified cash method of accounting. However, prior to the TCJA, a C corporation that was not a personal service corporation generally could not use the cash method if its average gross receipts for the three prior tax years exceeded $5 million. The TCJA increased this limit to $25 million ($26 million in 2020).

Consider a switch to the cash accounting method. Review all the implications with your professional tax advisor.

5. Employee Retention Credit: If your business keeps workers on the books in 2020, it may claim the Employee Retention Credit (ERC). The ERC, authorized by the CARES Act, is equal to 50% of the first $10,000 of qualified wages paid to employees after March 12, 2020 and before January 1, 2021.

An employer qualifies for the ERC if it suspended operation during any calendar quarter due to government orders relating to the COVID-19 pandemic or it experienced a significant decline in gross receipts (i.e., gross receipts equal to less than 50% of the gross receipts for the same calendar quarter in 2019).

6. Start-up costs: During these uncertain economic times, your may have pivoted into a new business undertaking. The tax code provides a special write-off of up to $5,000 of qualified start-up expenses. This includes costs normally deductible by an active business. However, you must actually get the business going before 2021 to qualify for this tax break.

Start-up costs above $5,000 must be amortized over 180 months. In addition, the deduction begins to phase out for expenses above $50,000.

7. Work Opportunity Tax Credit: An employer looking to increase its staff at year-end can claim the Work Opportunity Tax Credit (WOTC) for hiring disadvantaged workers from one of several “target” groups. Generally, the WOTC equals 40% of the first-year wages of up to $6,000 per employee, for a maximum of $2,400. For disabled veterans, the credit is available for the first $24,000 of wages, for a maximum of $9,600.

The WOTC has expired and been reinstated numerous times in the past. Currently, it is scheduled to go off the books again after 2020.