5 ways to close out 2020
Finish the year with these business moves
There’s still time to take stock of your taxable income and tax liability for the year.
Here are five recommendations to help maximize your dollars:
1. Evaluate the tax impact of your PPP loan. If your business received a Paycheck Protection Program loan this year, be aware that the current IRS position is that you cannot deduct any of the expenses you’re expecting to receive PPP forgiveness for—whether or not your loan has been forgiven. That means those employee wages, utilities and rent costs covered under your PPP loan currently are not tax-deductible. Work is underway to change that position, but it’s far from a certainty. At KCoe-Isom, we’re currently advising PPP recipients to evaluate their situation before applying for loan forgiveness due to the IRS position as well seek additional guidance on other items affected by the PPP loan.
2. Prepare a good tax plan and identify income deferrals. For example, if you received crop insurance for the 2020 crop in 2020 but normally would not sell your crop until the following year, you could have the opportunity to defer the crop insurance proceeds until the 2021 tax year. Take a little time to gauge whether that deferral is to your advantage or not.
3. Consider whether to defer commodity income into next year. If you have sold your crop—the price and basis are set—but you haven’t received payment, you can defer your sales into the following year. Since the deferral is by contract, you might want to use multiple payment contracts for more flexibility. Instead of locking in the sale price with one large contract, look at creating several smaller agreements to increase the flexibility in deferring income.
4. Consider gift-giving to family members or others now. For 2020, you’re allowed an estate and gift tax exemption of $11.4 million. This level, however, could change under the new administration. Now is the time to evaluate if you have gifts you need to make under the current exemption amount as opposed to future dates.
5. Look for tax advantages on business equipment purchases. Section 179 allows a business to immediately expense the cost of qualifying property, rather than recovering such costs through depreciation deductions. For 2020, the Section 179 limit is $1 million. But there’s something else to keep in mind this year: Tangible business equipment purchased to modify businesses to conform with COVID-19 restrictions and measures will generally qualify for the Section 179 tax deduction. This includes sanitizing stations, temperature-check stations, dividers/plexiglass shielding, new printed signage and equipment to modify the workspace for employees and/or the public. Another write-off option is the bonus depreciation. Under it, you may also be able to write off 100% of most depreciable business assets in the year your business placed them in service. Old and new machinery, equipment, computers, appliances and furniture generally qualify. Think through the implications of both Section 179 and bonus depreciation. Don’t make poor business decisions now to get tax benefits later.
As always, consult with a tax advisor to make sure you’ve considered both short-term and long-range implications.
Editor’s note: Maxson Irsik, a certified public accountant, advises owners of professionally managed agribusinesses and family-owned ranches on ways to achieve their goals. Whether an owner’s goal is to expand and grow the business, discover and leverage core competencies, or protect the current owners’ legacy through careful structuring and estate planning, Max applies his experience working on and running his own family’s farm to find innovative ways to make it a reality. Contact him at [email protected].
