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Submitted By: Julie Miller on Mar 2, 2021 12:40:46 PM
Good news! Business taxpayers may still be able to take actions to lower their federal income tax liabilities for 2020, as well as for future years. Consider these ideas before you file last year’s return.
Claim 100% First-Year Bonus Depreciation—Or Maybe Not
For qualifying assets placed in service in 2020, business taxpayers can deduct 100% of the cost in the first year. The 100% immediate write-off is allowed for both new and used qualifying assets, which include most categories of tangible depreciable assets.
Claiming 100% first-year bonus depreciation whenever it’s allowed is usually considered a tax-smart move. But you should think twice about claiming it for 2020 additions if you anticipate higher tax rates in future years. In that case, consider forgoing bonus depreciation on last year’s return and, instead, depreciate the assets in question over a number of years. That way, the depreciation write-offs will offset future income that you suspect might be taxed at higher rates. The choice to claim 100% first-year bonus depreciation for 2020 asset additions (or not) is made on last year’s return.
Important: Factor the net operating loss (NOL) issue into your decision. The CARES Act allows a five-year carryback privilege for a NOL that arises in a tax year beginning in 2020. Claiming 100% first-year bonus depreciation can potentially create or increase an NOL for the year. If so, the NOL can be carried back, and you can recover some or all of the federal income tax paid for the carryback year. This factor argues in favor of claiming 100% first-year bonus depreciation on last year’s return. Talk with your SSB tax advisor about what makes the most sense for your specific situation.
Take Advantage of COVID-19 Relief Provisions
The CARES Act included various tax relief provisions for business taxpayers. These provisions can impact last year’s business return. Here are four examples.
Important: Businesses with average annual gross receipts of $25 million or less (adjusted for inflation) for the three previous tax years are exempt from the business interest expense deduction limitation. Certain real property businesses and farming businesses are also exempt if they choose to use slower depreciation methods for specified types of assets.
Establish SEP for Big Tax Savings
If you work for your own small business and haven’t yet set up a tax-favored retirement plan for yourself, consider creating a simplified employee pension (SEP). Unlike other types of small business retirement plans, a SEP can be created this year and still generate a deduction on last year’s return. In fact, if you’re self-employed and extend your 2020 Form 1040 to October 15, 2021, you’ll have until then to establish a SEP and make a contribution for last year.
The deductible contribution can be up to:
The absolute maximum amount you can contribute for the 2020 tax year is $57,000. Beware: You may not want a SEP if your business has employees because you might have to cover them and make contributions to their accounts, which could make this option cost-prohibitive.
Can You Claim the QBI Deduction for 2020?
For tax years beginning in 2020, you can potentially claim a personal federal income tax deduction for up to 20% of qualified business income (QBI) from a so-called “pass-through” business, such as:
The QBI deduction is subject to restrictions that can apply at higher personal income levels. If you qualify, the deduction is claimed on your 2020 Form 1040, which is due on April 15 (or October 15 if you extend your return). Your SSB tax professional can interpret the complicated QBI deduction rules and calculate your maximum allowable write-off.
Extend Your Business Return
2020 was a crazy year. COVID-19-related tax relief measures and the election outcome have created lots of moving parts. Business owners have much to consider before filing their last year’s income tax returns.
Moreover, what you choose to do on last year’s return can affect your tax bills for later years. All things considered, extending last year’s return might be a wise move. That would give you more time to evaluate all the relevant factors in your specific situation. Here’s an overview of the due dates for different types of businesses.
Important: While you can extend the deadline for filing your return, you can’t extend the deadline for paying what you owe without penalty.
Consult with an SSB Tax Pro
These are just some of the last-minute tax-saving maneuvers that business owners can take before Tax Day. As always, your SSB tax professional can advise you on the optimal strategies for your specific situation.
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