The year’s end is always a good time for manufacturers to set tax planning strategies. But as we know, 2020 isn’t just any year. In addition to the usual opportunities, COVID-19 (and the resulting aid packages) adds a whole new wrinkle to the process.
Now more than ever, manufacturers can minimize tax exposure based on current tax law, the nuances of your industry and the size of your business. Now is the time re-evaluate your business practices to get the greatest tax advantage. Check out these effective tax planning strategies and see if they can help you.
The CARES Act Effect
This year several provisions were enacted to help businesses and individuals financially in the wake of the pandemic. Passed as parts of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, they saved countless people from fiscal disaster. These provisions can also have an impact on your 2020 tax return.
While most are beneficial, one could prove to be a rude surprise: Paycheck Protection Program (PPP) loan forgiveness amounts. While the amount itself isn’t taxable income, the expenses your loan covered—which are normally deductible—will not be deductible this year. This could leave you on the hook for tens of thousands of dollars if you’re not careful. While you can’t avoid this consequence, being aware of this possibility will help your planning efforts.
Then there’s the possibility that you could still be waiting for forgiveness approval in early 2021. If this happens, consider filing an extension for your 2020 return. It’s not yet known what happens if you deduct expenses only to find out the loan is forgiven (or vice versa). Postponing your return allows time for these details to become clearer. But remember that all 2020 taxes are due by April 15, 2021, even if you extend your return.
Although PPP loan forgiveness can throw a wrench into your return, there are other opportunities to save. The CARES Act included a stipulation waiving the carryback period for net operating losses (NOLs). Under the new law, NOLs you experience from Jan. 1, 2018 through Dec. 30, 2020 can be carried back to each of the preceding five tax years. It also suspended (for individuals) excess business loss rules stipulated by the Tax Cuts and Jobs Act (TCJA).
Provisions for charitable giving are also on the table. Even if you don’t itemize deductions, you can deduct $300 of qualified charitable contributions as an adjustment to gross income. If you do itemize, the CARES Act lifts the TCJA’s giving deduction cap to 100% of adjusted gross income for individuals (or those married filing jointly). The cap for C corporations is increased to 25% for this tax year.
Don’t forget about those stimulus payments (which was actually just an advance of a refundable tax credit)! If your income was too high last year to qualify, but your income is down in 2020, you may be eligible for the credit when you file your 2020 tax return.
Accelerate Your Expenses
Planning to purchase equipment? Don’t wait until the final days of the tax year. Now is the time to buy or finance those purchases. Thanks to the Tax Cuts and Jobs Act (TCJA), you can deduct 100% of the cost of equipment that was placed in service in 2020. (Read more about bonus depreciation.)
When was the last time you reviewed your receivables? If you are an accrual basis taxpayer, then you pay taxes based on what is recorded in your accounts receivable. If you have receivables on the books that you know are uncollectible, you might consider writing them off as bad debt. Also, if you’re an accrual basis taxpayer, make sure you’re accruing all ordinary and necessary expenses properly at year-end so you don’t miss any deductions.
If you’re a cash basis taxpayer, consider paying down your accounts payable at year-end. Remember that credit card charges are deducted in the year charged, not the year the credit card is paid down.
Finally, have you reviewed your inventory recently? Writing off any obsolete inventory adds value to your business in two ways— it provides a tax deduction and it makes your financials more realistic.
Consider Your Method of Accounting
Many manufacturers have already taken advantage of changes under the TCJA. Thanks to this law, there are more opportunities for small business owners (defined as average annual gross receipts of less than $26M) to reduce their tax liability and keep more money in their pockets. Such tax planning strategies include changing your accounting method for inventory, electing out of Section 263A or converting from accrual to cash basis (or vice versa).
Learn more about this and other measures (like inventory costing changes) that impact small manufacturers.
Don’t Forget State R&D Tax Credits
If you’re a target industry business that engages in research and development in Florida, you could be eligible for the Corporate Income Tax Research and Development Credit. Each year, the state provides up to $9 million in corporate income tax credits for qualified research expenses.
While applications don’t open until March of next year for 2020 expenses, the window to apply lasts only one week. So now is the time to obtain the necessary certification and gather the required materials.
Leverage Retirement Planning to Help Now
By maximizing your retirement contributions, you not only save for your future, but you get a tax deduction right now. Explore the possibilities of a different approach to saving for your retirement.
Another often forgotten but extremely wise way to save for your retirement is through the use of a Health Savings Account (HSA). Contributions to an HSA are tax deductible and as long as the money is used for qualified medical expenses, the growth in the account is not taxable when the money is used.
Ready to dive deeper into any of these tax planning strategies? Careful consideration must be given to these potential opportunities, as there are many options and considerations to ensure the right path for your company. Contact your manufacturing CPAs to see how these and other strategies can help you improve your business.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.