Top Tax Planning Strategies for Your Organization

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Year-round, proactive tax planning (rather than waiting until year end or April 15th) can help businesses manage federal and state tax burdens and take full advantage of available credits and deductions. Advanced tax planning is smart business planning. This is especially true now due to the lack of clarity on what changes pending tax legislation may bring.

Here are a few common tax planning strategies that all businesses can consider.

Utilize Depreciation

Depreciation allows businesses to recover, as an expense, capital expenditures. This expense reduces taxable income and, consequently, the overall tax burden.

Plus, thanks to the Tax Cuts and Jobs Act, businesses can depreciate 100% of certain property the year it is acquired. The 100% bonus depreciation is currently in effect until 2022. There will then be a phase-down of the bonus depreciation percentage by 20% each year from 2023 through 2026.

Since depreciation is an accounting method, accelerating deductions into years with higher tax rates could result in permanent savings. Now may be the time to look at property and depreciation methods to ensure maximum tax benefits.

Asset Depreciation and Credit and Deduction Realization
Taking a comprehensive and proactive approach to realizing material deductions and credits associated with constructed assets is also an important piece to tax planning. Businesses should consider:

  • Fixed Asset Planning
  • 179D Energy Deduction
  • Cost Segregation
  • 45L Energy Credit
  • Tangible Property Regulations
  • Construction Tax Planning
  • Energy Star for Buildings
  • Historical Tax Credit

Working with a team to take a holistic approach to tax depreciation and leverage your past, present and future asset additions is key.

Cost Segregation
A cost segregation study is another way to increase cash flow by utilizing depreciation. A cost segregation study examines your building and identifies those separate assets that you can depreciate over a variety of recovery periods. A cost segregation study is specifically used on any type of owned real estate. Examples include renovated, constructed or purchased assets.

Further, cost segregation studies allow for tax planning in reverse, meaning cost segregation studies can generate significant tax savings and associated cash flow even if property was purchased or constructed and placed into service in prior years.

If you own real estate, cost segregation can be a powerful tax planning tool. We’ve broken down the “ins and outs” of cost segregation studies, including the involved processes and real-life success stories.

Section 199A and the 20% Pass-Through Deduction

Certain types of income (called “qualified business income”) is eligible for a 20% deduction. Pass-through businesses like sole proprietorships, partnerships, and S corporations can all possibly generate qualified business income. Qualified business income is defined as domestic, net business income and does not include wages or guaranteed payments and certain investment income.

Timing Considerations

Timing the recognition of income and expenses can help businesses manage their tax liabilities. For some businesses, it may mean accelerating income and deferring expenses. For others, it may mean deferring income and accelerating expenses. Deciding on the optimum strategy for your business often requires multi-year projections using varying alternatives.

Accounting Method Planning

Tax accounting method planning is ordinarily focused on generating tax benefits by accelerating tax deductions and deferring taxable income to reduce the amount of tax owed in the current year. Where statutory tax rates remain constant, taxpayers often overlook the benefits of accounting method planning because moving income or expense items into different periods generally does not result in permanent tax savings. Instead, it merely generates a timing benefit that will reverse in future years. However, in an environment with possible rate changes, permanent tax savings can be obtained.

Preparing your books for year-end is easier with the right tools, resources and planning.

Utilize Charitable Contributions

Contributions to qualified organizations (like charities) can be timed and structured to maximize tax benefits.

Types of contributions to consider include:

  • Cash donations
  • Stock donations
  • IRA donations
  • Donor-advised funds
  • Private foundations
  • Charitable remainder trusts

The type of contribution as well as the type of asset donated and the timing of a gift are among the factors requiring careful consideration. Note valuations (and certain other tax forms) may sometimes be required to support a contribution deduction.

Pass-through Entity Taxes

Under the Tax Cuts and Jobs Act, the deduction for state and local taxes for individuals itemizing deductions is limited to no more than $10,000 ($5,000 if married filing separately) for tax years 2018 through 2025. In response, many states have enacted, or are expected to enact, laws that can impose an entity level income tax on partnerships and S corporations and allow owners an offsetting credit, deduction, or other tax benefit. In this way, owners can often avoid the limitation on state and local taxes, effectively receiving a full deduction through the pass-through entity. However, the analysis can be complex and requires careful planning on the part of pass-through entities and their owners.

Here's what you need to know about how to work with the SALT deduction cap.

Reporting Foreign Assets

  1. Do you have signature authority in a foreign bank account?
  2. Do you have ownership in non-US entities such as foreign corporations, partnerships, or disregarded entities?
  3. Are you the beneficiary or owner of assets held in a foreign trust?
  4. Did you receive a gift or inheritance from non-US persons?
  5. Do you have ownership in other foreign assets such as foreign pensions, foreign rental property, foreign brokerage statements, foreign life insurance investments, etc.?

Failure to timely file international forms and returns can result in serious penalties and other adverse consequences.

The Importance of Tax Planning

Proactive and timely tax planning can produce savings for many businesses. Consulting with your adviser throughout the tax year as well as at the time of any material events (like the purchase and sale of a business, the construction of a new building, or the acquisition of a new asset) can save time and expense and result in a more efficient process for all involved parties. And as new legislation is enacted and regulatory guidance released, timely meetings with a tax adviser can ensure that businesses are best situated to adapt to the changing landscape.

Strategic tax planning can help save your organization valuable time and resources.

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