In the midst of economic uncertainty and an unclear future, many organizations are looking for ways to contain costs and protect key assets. One way to do this is through tax planning. Strategies for deferring income or accelerating deductions for tax-related reporting can save you time and money.
While many think of taxes around April 15, year-round, proactive tax planning can help you be better prepared to minimize your federal and state tax burden and ensure you take full advantage of available credits and deductions. Advanced tax planning is smart business planning.
Here are a few common tax planning strategies that you should be considering for your organization, even during a time of uncertainty.
Depreciation allows organizations to record the value loss of an asset as an expense. This expense then reduces taxable income and, consequently, an organization’s overall tax burden. Plus, thanks to the Tax Cuts and Jobs Act, organizations can depreciate 100% of qualified property the year it is acquired. This is good for qualified property of up to $1 million.
Bonus depreciation of 100% is currently in affect 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. If you have property that has not been analyzed to ensure the most advantageous depreciation methods are being utilized, now may be the time to take another look.
Cost Segregation Study
A cost segregation study is another way to increase cash flow by utilizing depreciation. Cost segregation studies help outline accelerated depreciation deductions, reducing taxes paid in a given year. A cost segregation study is specifically used on any type of owned real estate. Success has ben found in instances of business renovation, construction or purchase.
Cost segregation is a great tool for tax planning and increased cash flow.
Review Your Business Structure
The type of business entity you have can directly impact your tax planning strategies. The taxation of income and owner liability are the main factors that differentiate a business structure from another. It’s important to consider the tax consequences for each structure type.
Section 199A and the 20% Pass-Through Deduction
Certain entity types can deduct 20% of qualified business income. This includes pass-through businesses like sole proprietorships, single-member LLCs and S corporations. Qualified business income is defined as domestic, net business income and does not include wages or guaranteed payments and certain investment income.
Is the 20% deduction for pass-through businesses right for you?
Time Income and Expenses
One way to plan and save from a tax perspective is by properly timing income and expenses. This key tax planning strategy can help you reduce tax liability. For some organizations, it may mean accelerating income and deferring expenses. For others, it may mean deferring income and accelerating expenses. While this may seem an odd thing to do in the current economic climate, delaying income in the current year allows your tax liability to be decreased, lessening the tax burden of your organization and increasing cash flow.
Important items to consider when it comes to timing income and expenses include:
Accounting Method Planning
Tax accounting method planning is ordinarily focused on generating cash 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.
Utilize Charitable Contributions
Donating to charities and nonprofits is an incredibly beneficial tax planning strategy. By controlling the timing of when you give your donation, you can use charitable giving to strategically tax plan.
Types of contributions to consider include:
No matter how you decide to contribute, make sure you’re donating to a qualified charity in order to ensure it is eligible to receive tax-deductible contributions. It’s also important to obtain valuations and file the proper forms as needed to ensure non-cash donations qualify.
The Importance of Tax Planning
Proactive, smart tax planning can have lasting implications on your organization and its bottom line. By strategizing ways to limit your tax liability and review your income and expenditures, you can better position your organization and increase its cash flow.
It’s also important to understand that continually released guidance will impact your tax planning strategies. Working alongside a tax advisor to make sense of your tax plan will not only help ensure compliance, but it will also ensure you have strategies that will meet your overall business goals.
Tax planning can help save your organization time and resources.