2020 has been a tumultuous year for American manufacturers with some businesses just barely surviving while others have experienced a modest slowdown or limited growth. Despite the current environment, manufacturers should begin to consider the tax implications of events that have already occurred and/or events expected to occur during the remaining months of 2020. Corporate and non-corporate taxpayers should also begin to consider the implications of the 2020 election year, and the potential for tax law changes in 2021, or soon thereafter. Below are our top tax planning strategies for manufacturers in 2020:
- QBI deduction: Certain taxpayers may be entitled to a deduction of up to 20% of their Qualified Business Income (QBI). For 2020, if taxable income exceeds $326,600 for a married couple filing jointly, $160,700 for singles and heads of household, and $163,300 for married filing separately. Certain limitations apply to Specialized Service Trade or Businesses (SSTBs). These SSTB’s include lawyers, accountants, health and other professionals and consultants. The amount of the limitation is based on the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitation begins to phase-in for joint filers with taxable income between $326,600 and $426,600 and for single taxpayers with taxable income between $163,300 and $213,300. To the extent possible, taxpayers may be able to structure current year income or deductions to maximize the benefit of QBI from year to year. Taxpayers might also look to adjust W-2 wages before year-end if a limitation is expected. Thoughtful planning is required in order to navigate the complex rules related to QBI.
- Section 179 Deduction: Businesses should consider making expenditures that qualify for the Section 179 business property expensing option. For tax years beginning in 2020, the expensing limit is $1,000,000, and the investment ceiling limit is $2,550,000. This deduction applies to most depreciable property (other than buildings) and off-the-shelf computer software. A recent change in the rules affects the eligibility to now deduct qualified improvement property (generally, any interior improvement to a building’s interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems. The expensing limit that applies this year means that many manufacturers that make timely purchases will be able to currently deduct most if not all their investment for machinery and equipment. An added benefit is that taxpayers can plan to place assets in service at the end 2020, but still enjoy a full deduction up to the 2020 limitation threshold. Thus, property acquired and placed in service in the last days of 2020 can result in a full Section 179 expense deduction for 2020.
- Bonus Depreciation: Businesses can claim a 100% first-year bonus depreciation deduction for newly purchased machinery and equipment (whether used (with some exceptions) or new) and placed in service during 2020. Similar to the Section 179 deduction, the deduction is available even if qualifying assets are in service for only a few days in 2020.
- Change in Accounting Method: **Changing your accounting method from the accrual method to the cash method of accounting can be an effective tax planning strategy for manufacturers.** As a result of recent tax law changes. more small businesses are now eligible to use the cash (as opposed to accrual) method of accounting. Under the recent change. A taxpayer must, among other things, satisfy a gross receipts test. For 2020, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts do not exceed $26 million. Shifting income as a cash method taxpayer can be an effective strategy. This can often be done by deferring invoice payment deadlines until next year or by accelerating the payment on certain expenses that are incurred before year end.
- Safe-Harbor Repair & Maintenance Expense: Manufacturers may be able to take advantage of the de minimis safe harbor election to immediately expense the costs of lower-cost assets and materials and supplies (certain exceptions may apply). To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there is no AFS, the cost of a unit of property cannot exceed $2,500. Manufacturers who expect to incur eligible R&M expenses might consider accelerating those expenses into 2020 before the end of the year.
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