2019 Last-Minute Year-End General Business Income Tax Deductions

The purpose of this article is to get the IRS to owe you money!

Of course, the IRS is not likely to cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes.

This article gives you five powerful business tax deduction strategies that you can easily understand and implement before the end of 2019.

1. Prepay Expenses Using the IRS Safe Harbor

You just have to thank the IRS for its tax-deduction safe harbors.

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.1

Under this safe harbor, your 2019 prepayments cannot go into 2021. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.

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

Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Tuesday, December 31, 2019, you mail a rent check for $36,000 to cover all of your 2020 rent. Your landlord does not receive the payment in the mail until Thursday, January 2, 2020. Here are the results:

You get what you want—the deduction this year.

• You deduct $36,000 in 2019 (the year you paid the money).

• The landlord reports $36,000 in 2020 (the year he received the money).

The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.

Don’t surprise your landlord: if he had received the $36,000 of rent paid in advance in 2019, he would have had to pay taxes on the rent money in 2019.

Before sending a big rent check to your landlord, make sure the landlord understands the strategy. Otherwise, he might not deposit the rent check (thinking your payment was a mistake) and instead might return the check to you. This could put a crimp in the strategy, because you operate on a cash basis.

Also, think proof. Remember, the burden of proof is on you. How do you prove that you mailed the check by December 31? Think like an IRS auditor or, better yet, a prosecuting attorney.

Answer: Send the check using one of the postal service’s tracking delivery methods, such as priority mail with tracking and possibly signature required, or one of the old standards, such as certified or registered mail.

With these types of mailings, you have proof of the date that you mailed the rent check. You also have proof of the day the landlord received the check.

If you are using USPS online tracking, make sure to print the delivery and receipt tracking results for your tax records, because that tracking information disappears from the postal service records long before you would need it for the IRS.

2. Stop Billing Customers, Clients, and Patients

Here is one rock-solid, time-tested, easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2019. (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.

Example. Jim Schafback, a dentist, usually bills his patients and the insurance companies at the end of each week; however, in December, he sends no bills. Instead, he gathers up those bills and mails them the first week of January. Presto! He just postponed paying taxes on his December 2019 income by moving that income to 2020.

3. Buy Office Equipment

With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 100 percent of the cost in 2019.2

Qualifying bonus depreciation and Section 179 purchases include, among others, new and used personal property such as machinery, equipment, computers, desks, furniture, and chairs (and certain qualifying vehicles).

4. 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.3 Therefore, as a Schedule C taxpayer, you should consider using your credit cards 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.4

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 before midnight on December 31.

5. Don’t Assume You Are Taking Too Many Deductions

If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL.5

If you are just starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business.

You used to be able to carry back your NOL two years and get immediate tax refunds from prior years; however, the Tax Cuts and Jobs Act eliminated this provision.6 Now, you can only carry your NOL forward, and it can only offset up to 80 percent of your taxable income in any one future year.7

Don’t worry—you can still get immediate use of your business loss in 2019 by using the strategies outlined in Five Strategies for Your Business Losses after Tax Reform. But to make those strategies work, you’ll need to take action before December 31.

What does this all mean? You should never stop documenting your deductions, and you should always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss.

But this won’t happen to you. Why? Because, as a subscriber (member), you know all deductions are valuable. And you know even those deductions not used this year can create tax benefits for you in the future.

Takeaways

When it comes to your taxes, business deductions are king. The more business deductions you can claim, the better. The more business deductions you claim, the less you pay in regular taxes.

Yes, paying less in taxes is good.

Here are the five last-minute tax deduction strategies we covered in this article:

1. Prepaying your 2019 expenses right now reduces your taxes this year, without question. While it’s true you kicked the can down the road some, perhaps you have an offset with a big deduction planned for next year. And even if you don’t have such a plan at the moment, you have plenty of time to create one or to put additional big deductions in place for 2020.

2. The easiest year-end strategy of all is simply to stop billing your customers, clients, and patients. Once again, this kicks the can down the road some and makes your 2020 tax planning more important.

3. With 100 percent bonus depreciation and increased Section 179 expensing in 2019, you can make significant purchases of equipment, machinery, and furniture and write off 100 percent of the value. Make sure you place the assets in service on or before December 31, 2019, to get the deduction this year.

4. Charges to your credit cards can create deductions on the day of the charge. This is absolutely true if you are a sole proprietor or if you operate as a corporation and the credit card is in the name of the corporation. But if you operate as a corporation and the credit card is in your personal name, your corporation needs to reimburse you before December 31 to create the 2019 deduction at the corporate level.

5. And finally, claim all your legitimate deductions. Don’t think you have too many, and don’t try to avoid deductions that you think could be a red flag. First, it’s unlikely you could have enough deductions to create a red flag. Second, no one knows what those red flags are. Third, if the deduction is legitimate, it doesn’t matter if the IRS audits it—you’ll win.

Avoid These Big Problems When You Reimburse Staff For Company Expenses

Do You Reimburse Your Staff For Company Expenses?

Failure to use an accountable plan for your employee expense reimbursements (including yourself if you operate as a corporation) turns those improperly reimbursed expenses into taxable wages.

In other words, by failing to comply with the accountable plan rules, you turn the tax-free reimbursement into taxable W-2 wages. That’s about as dreadful as it can get (non-taxable into taxable from a simple and avoidable mistake).

Don’t Make These Mistakes

And here’s something to think about: If you have employees who incur business expenses on behalf of your business and you don’t reimburse them, they are simply out that money. The Tax Cuts and Jobs Act (TCJA) denies them a deduction for those business expenses.

And if you reimburse business expenses to yourself as a corporate owner or to your employees incorrectly, you turn what you thought was a tax-deductible reimbursement of business expenses into W-2 taxable income.

Think how ugly this is.

1. You incur a proper business expense.

2. Your corporation reimburses you, the shareholder-employee, for the expense but does so in violation of the rules.

3. You now have W-2 income from the improper reimbursement.

4. You have no personal tax deduction for the proper business expense.

5. Your corporation pays extra payroll taxes because the proper business expense is now a W-2 wage.

With some straightforward safeguards such as an accountable plan, you don’t have to suffer from the TCJA, or worry about business expenses disappearing or creating unhappy employees such as yourself.

Without an accountable plan, business expense reimbursements can easily be improper and count as additional taxable wages.

• For you and your employees, that results in an increase in both (a) personal income taxes and (b) FICA taxes on the reimbursements.

• Your company pays the employer’s share of FICA taxes on the reimbursements.

With proper reimbursement under an accountable plan, the employee receives the expense reimbursement tax-free. The corporation deducts the business expenses.

If you don’t currently have an accountable plan in place, book a call with me below and I’ll help you get a proper plan in place.

Get a Free Tax Savings Consultation

Pinewood Consulting’s CPAs will help you assess your tax savings potential through a free consultation. Book yours today with Chad Pavel, CPA.

How To Sell Your C-Corporation Tax Free

Section 1202 allows you to sell a qualified small business corporation (QSBC) on a tax-free basis.

Now, add to this no-tax-on-sale benefit to the 21 percent corporate tax rate from the Tax Cuts and Jobs Act, and you have a significant tax planning opportunity.

Imagine This

You sell your C corporation. The sale produces a $6 million capital gain to you.

Your federal income tax bite on the $6 million of gain is zero. Yes, you are awake. You are reading this correctly. The tax bite is zero.

Internal Revenue Code Section 1202 establishes the rules for the zero tax bite. To get to zero, you need to operate your business as a tax code-defined QSBC.

You may already have a tax code-defined small business corporation, or you may be thinking of starting a new business as a small business corporation. Paying zero taxes on the sale of your business stock is a big incentive.

100 Percent Gain Exclusion Break (Tax-Free Capital Gains)  

To qualify for tax-free capital gains, you must acquire your QSBC stock after September 27, 2010.

You Must Own The Stock For More Than Five Years

Of course, there’s more than one rule. You must hold your QSBC stock for more than five years to qualify for the tax-free treatment.

Limitations on Excludable Gains

Your beloved lawmakers impose limits on your tax-free capital gains from the sale of a particular QSBC. In any taxable year, the tax limits on your eligible gain exclusion may not exceed the greater of 

• 10 times the aggregate adjusted basis in the QSBC stock you sell, or

• $10 million reduced by the amount of eligible gains that you’ve already taken into account in prior tax years from sales of this QSBC stock ($5 million if you use married filing separate status).

Example 1: $10 Million Limitation

You are a married joint filer. You invested $100,000 when you started your C corporation in 2012.

Now, in 2019 (more than five years after the start), you sell the stock in the C corporation for $6.1 million. You have tax-free capital gains equal to the greater of

1. $1 million (10 x $100,000), or

2. $6 million (because it’s less than $10 million).

You have $6 million of tax-free capital gains.

Example 2: 10-Times-the-Basis Limitation

You are an unmarried individual. You invest $2 million in a single QSBC stock this year.

In 2025, more than five years from now, you sell this stock for $24 million, resulting in a total gain of $22 million ($24 million - $2 million). The tax code limits your tax-free gain to the greater of 

• $20 million (10 times the basis of the stock), or

• $10 million.

In 2025, you have $20 million in tax-free capital gains and $2 million in taxable capital gains. You have to be smiling.

Definition of QSBC Stock

To be eligible for the QSBC gain exclusion, the stock you acquire must meet the requirements set forth in Section 1202 of our beloved Internal Revenue Code. Those requirements include the following:

• You generally must acquire the stock upon original issuance or through gift or inheritance.

• You must acquire the stock in exchange for money, other property (not including stock), or services.

• The corporation must be a QSBC at the date of the stock issuance and during substantially all the period you hold the stock.

 Next, you have to look at the rules that apply to the corporation. To qualify as a QSBC, the following rules apply.

Rules for the Corporation

The corporation must be a domestic C corporation.

The corporation must satisfy an active business requirement. That requirement is deemed satisfied if at least 80 percent (by value) of the corporation’s assets are used in the active conduct of a qualified business.

Beware. Qualified businesses do not include:

• the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any other business where the principal asset is the reputation or skill of one or more of its employees;

• banking, insurance, leasing, financing, investing, or similar activities;

• farming (including raising or harvesting timber);

• production or extraction of oil, natural gas, or other natural resources for which percentage depletion deductions are allowed; or

• the operation of a hotel, motel, restaurant, or similar business.

The corporation’s gross assets cannot exceed $50 million before the stock is issued and immediately after the stock is issued (which considers amounts received for the stock).

Get a Free Tax Savings Consultation

Pinewood Consulting’s CPAs will help you assess your tax savings potential through a free consultation. Book yours today with Chad Pavel, CPA.