Year-end Tax Planning for Businesses
Because we work with business owners in multiple industries, we have clients who have done well in 2020 and those who have struggled. Regardless of how your business has performed in 2020, you want to keep as much cash on hand going into 2021 so you are well-positioned for long-term growth.
Below are the top four tax planning strategies we are discussing with our business owner clients. And remember, if you would like to discuss how to strengthen your business, we invite you to reach out to Stratus for a complimentary consultation.
1. Stay Current with PPPL Forgiveness Rules: The SBA has yet to finalize the rules for loan forgiveness and Congress is still debating more lenient forgiveness for loans below $150,000. In the meantime, we encourage everyone to keep documentation of their covered period as well as the following expenses paid during that period: payroll and employee headcount, mortgage interest and/or rent, and utilities. Many payroll services have specific PPPL reports and we encourage you to check with your payroll provider for more information.
2. Maximize Your Expenses: With the ability to offset up to 100% of your net income for tax years 2018, 2019, and 2020, we encourage you to discuss strategies with your accountant and/or business advisor to maximize your 2020 expenses. Being strategic about using depreciation and write-offs can help you save on taxes in 2020 if you are having a good year but for those having a tough year, maximizing your losses could allow you to retroactively create refunds in 2019 and/or 2018, thus providing a cash credit in 2021.
3. Discuss Segregating Costs: If you have bought (or are going to purchase) a new building, discuss the idea of cost segregation with your accountant and/or business advisor. While buildings are depreciated over 39 years, allocating the purchase price to other items (e.g., HVAC, electric, etc.) may allow you to depreciate a portion of the purchase price faster, thus helping to reduce some of your tax liability.
4. Set up a Family Limited Partnership (LP) or Limited Liability Company (LLC): With the current lifetime tax exemption of $11.58 million per person ($23.16 million for a married couple) set to expire on December 31, 2025, now may be the time for those with a net worth greater than $10 million to think about moving assets out of their taxable estate in case the lifetime tax exemption is reduced.
One option for a family-run business which can help the parents and/or grandparents reduce their estate tax liability while teaching younger generations about proper asset stewardship, is to set up a Family LP or LLC. These entities allow families to contribute assets that are then managed jointly by a multigenerational family committee. Over time, the older generations can gift their ownership interest to younger generations, thus reducing the assets in their taxable estate while increasing the next generations’ responsibility for managing the family assets.
5. Decide When to Apply for PPPL Forgiveness: If you are a business who took a Paycheck Protection Program Loan (PPPL), we encourage you to discuss the timing of loan forgiveness with your tax and financial advisors. Current guidance from the IRS states that if the PPPL, or a portion thereof, is forgiven, the expenses associated with those funds will not be tax deductible. However, like so many of the PPPL rules, this could be changed by Congress. Therefore, it may behoove you to consider waiting to apply for forgiveness until early 2021. That will allow you to increase your deductions in 2020, reducing net income and tax payments or leading to larger losses that could offset income in prior years, while allowing you more time to plan for the potential that your 2021 expenses may be reduced by the amount of your PPPL forgiveness.