2020 Tax
Planning Guide

Tax Year-End Planning | 2020

As we approach the end of this unprecedented year, there are some tax opportunities your family and business may want to consider before year-end. The outline below includes some of these potential saving opportunities.

Please reach out to your local team at HiAccounting if you would like to discuss any of these opportunities. Our CPA’s and accounting professionals are ready to assist!

Phone: 808-529-9990
Email: [email protected]

Individual | Tax Considerations

QBI Deduction

If you operate as a proprietorship or pass-through business such as a partnership or S corporation, the Qualified Business Income (QBI) deduction offers you up to 20 percent tax deduction on your business income, subject to certain limitations. Limitations may apply if your income reaches the following thresholds for 2020,

  • $163,300 (Single, Head of Household, Married Filing Separate)
  • $326,600 (Married filing Joint)

Increasing 401(k) Contributions

Increase the amount of your pre-tax 401(k) contributions to reduce your adjusted gross income.

Maximize Deductions

The standard deductions for 2020 are,

  • $12,400 (Single, Married Filing Separate),
  • $18,650 (Head of Household) and
  • $24,800 (Married Filing Joint)

Bunching permitted itemized deductions such as charitable contributions and medical expenses can maximize your deductions to help surpass the standard deduction amount.

Charitable Giving

If you do not itemize your deductions, the CARES Act allows for a $300 above-the-line charitable contribution deduction. This deduction applies to 2020 only.

Solar Credits

The 26% credit for installing solar property on your personal use properties (primary residence, vacation home) drops to 22% for property installed after December 31, 2020 and no credit is available if the solar property is installed after December 31, 2021. Therefore, if you were planning on installing solar, you will want to consider doing that as soon as possible.

HSA

Now is also a good time to determine if your health insurance is a high-deductible health plan, allowing you to make a HSA (Health Saving Account) contribution. Some employers offer you the ability to do this as a salary deferral, so you may want to inquire.

Business | Tax Considerations

Here are several powerful business tax-deduction strategies that you can implement before the end of 2020:

Delaying Income

Stop Billing Customers, Clients, and Patients

Stop billing your customers, clients, and patients until after December 31, 2020. (We assume here that you or your corporation is on a cash basis and operates on the calendar year) Customers, clients, patients, and insurance companies generally don’t pay until billed. Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.

Maximizing & Accelerating Deductions

Prepay Expenses

IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.

For a cash-basis taxpayer, qualifying expenses could include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.

Buy Business Equipment

With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your vehicles, equipment or machinery and place it in service before December 31, 2020 and get a deduction for 100 percent of the cost in 2020. Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).

Use Your Credit Cards

If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.

If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.

But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that happens on the date of reimbursement. Thus, submit your expense report and have your corporation make its reimbursements to you by December 31, 2020.

Other Year-End Housekeeping Items

Health Insurance for >2% S-Corp Shareholders

If you pay for health insurance through, or are reimbursed by your S Corporation, the correct tax reporting for any shareholder that owns more than 2% of the company is to include the health insurance paid on their 2020 Form W-2 in Boxes 1 & 16 and Box 14. The health insurance payments are not subject to payroll taxes. All you need to do is inform whoever prepares your payroll that the corporation paid $XX amount of health insurance for the shareholder. The payroll service should know what that means and should then include the amounts on the shareholder’s W-2, as appropriate, added to wages reported in Boxes 1 & 16, with the amount of health insurance also reported in Box 14. If this is not done, the IRS position that is health insurance will be treated as an itemized deduction subject to a 7.5% of AGI limitation. (Please make sure the payroll is done correctly to include the health insurance premiums for >2% Shareholders on their 2020 Form W-2).

Personal Use of Company Car (PUCC)

If you reimburse yourself for auto mileage from your company, then read no further on this subject, as what follows will not apply to you. However, if your corporation pays for all your automobile expenses, you are required to include the PUCC fringe benefit amount in your W-2. It is considered taxable income to you subject to payroll taxes, and it will also appear in Box 14. Including this fringe benefit allows you to write-off all auto expenses on the business. The calculation for this fringe benefit is not terribly complicated – all you need to know is the approximate value of the auto when it was placed in service, and the number of miles driven during 2020 – both personal and total mileage for the year. Click links to download a worksheet and table that will allow you to make this calculation. An alternative calculation is to use the “commuting value method” which is to include $3/day as compensation, or $780 for the year. Including PUCC in your W-2 will show that you are complying with the fringe benefit rules, and if this does apply to you, we recommend you include the appropriate amount on your W-2. You will need to inform your payroll service of the PUCC fringe benefit that should be included on your 2020 W-2. Alternatively, you can reimburse the company for the amount of personal use and not include any amount as a fringe benefit.

Download PUCC Worksheet

Download PUCC Table

Reimburse Yourself

Please be sure to reimburse yourself for expenses that you may have paid on behalf of the corporation during the year. Related expenses may include travel, business meals and mileage, supplies, postage, phone, home office expenses, dues and subscriptions, etc. The reason it’s important to do this is so that the expenses are captured and deducted in full at the corporate level. Otherwise you may be leaving deductible expenses on the table, because if you try to deduct them as employee business expenses on your individual return, they are considered miscellaneous itemized deductions and are no longer deductible for federal tax purposes. Click here for an Excel template to organize and help document your expense reimbursement, and then all you have left to do is cut yourself a check or offset prior distributions you may have already made to yourself.

Download Expense Reimbursement Template

Unemployment (without Withholding)

If you have been receiving unemployment checks this year and have not been withholding federal or state income tax, consider reviewing your income for the year to determine if you should make fourth quarter estimated tax payments.

CARES Act | Additional Considerations

Waiving 10% IRA Withdrawal Penalty

The CARES Act provides a penalty-free withdrawal option for individuals impacted by the coronavirus.

Affected individuals can withdraw up to $100,000 without an early withdrawal penalty until December 31, 2020. You must meet certain qualifications to qualify for this treatment. You can repay the money within three (3) years of the distribution date and pay no tax or penalty on the amount.

Utilize Net Operating Loss Opportunities

Two (2) NOL opportunities for your business are:

  1. The CARES Act allows NOLs arising in tax years beginning in 2018, 2019, and 2020 to be carried back five (5) years for refunds against prior taxes.
  2. The CARES Act allows application of 100 percent of the NOL to the carryback years.

Before the CARES Act, you could not carry back your 2018, 2019, or 2020 losses, and your NOL could offset only up to 80 percent of taxable income before your Section 199A deduction.

Take Advantage of the Qualified Improvement Property (QIP) Correction

The CARES act fixed the QIP error made in the original TCJA tax reform. QIP is any improvement made by the taxpayer to the interior portion of a building that is non-residential real property (think office buildings, retail stores, and shopping centers) if you place the improvement in service after the date you place the building in service.

If you have such property on an already filed 2018 or 2019 return, it’s on that return as depreciable 39-year property. With the CARES act correction, you can now change it to 15-year property, eligible for both bonus depreciation and Section 179 expensing.

Summary | Final Thoughts

We know that some of the above considerations can be confusing and may be difficult to navigate. If we can be of further assistance, please do not hesitate to call us at 808.529.9990 or email us at [email protected]. Our experienced team of Certified Public Accountants (CPA), Enrolled Agents and Tax Professionals can help you and your business take advantage of all available opportunities!

Aloha,
The HiAccounting Team


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