Year-End Tax Planning Hot Topics

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Year-End Tax
Planning Hot Topics
December 10, 2019

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Meet Your
Speakers
 Daniel Mayo, JD, LLM, Principal
 Dominick Salerno, CPA, Tax Manager

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Withum 2019 Year-End Tax Planning
Guide
 This presentation highlights some of
Withum’s year-end tax planning ideas
 For a more complete list, see Withum’s 2019
Year-End Tax Planning Guide
• Individuals
• Businesses
• International tax
• SALT
• Transfer Pricing

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Year-End Strategies for Individuals
 General advice is to defer income and to accelerate deductions
• Defers income tax and possibly eliminates some of it if you expect a lower
tax rate in the next year
 Standard Deduction vs. Itemizing
• Given the larger standard deduction ($12,200 for single, $24,400 for MFJ),
and limits on itemized deductions, planning is more important now than
ever
 Gaming the Standard Deduction
• Goal is to maximize 2019 itemized deductions so they exceed the standard
deduction
• Increase expenditures in 2019
 Additional charitable contributions
– Bunching and use of donor advised funds
 Accelerate January 2020 residential mortgage payment to get 13 months of interest
in 2019
 No need to accelerate R/E and state income tax payments because of $10K overall
SALT limitation
– States recently lost in their federal lawsuit challenging the cap, but some are appealing
 Accelerate medical expenses to exceed the 10%-of-AGI floor (including elective
medical procedures, dental work, and vision care)

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Individuals (cont’d)
 Sales or gifts of appreciated capital assets (e.g., stocks/bonds/mutual
funds)
• Sales
 Hold long-term (more than 1 year) to get benefit of lower tax rates
– Must hold unhedged or could lose holding period (tax straddles: e.g., stock and put option)
– LTCG max tax rate of 20% (plus 3.8% NIIT)
• Gifts
 If to an individual, better to gift the asset rather than to sell it (regardless of holding
period)
 Donee gets tacked holding period and carryover basis
 Donee (and not you) realizes the capital gain when they sell (except tax-exempt
charitable organizations)
– Some taxpayers (e.g., kids or grandkids) may get 0% or 15% tax rate on dividends and capital
gain
– Watch out for kiddie tax if recipient is under age 24 – income taxed at higher rates that apply
to trusts/estates
 Generally, with gifts to charitable organizations, you can deduct your cost basis unless
you held the asset for more than 1 year
 Don’t wait until the last minute because your broker and the charity may need time to
effectuate the transfer
 Use a donor advised fund to buy yourself time to choose the best charity (deduct now
and allocate later)
 If 70½ in 2019, consider using stock held in an IRA
– No tax inclusion, no tax deduction, and amount reduces your RMD

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Individuals (cont’d)
 Sales or gifts of depreciated (i.e., loss) capital assets
• Sales
 Tax loss harvesting – sell depreciated assets in taxable accounts
to realize the loss
 Capital losses can offset capital gains
– Best to offset against STCG because STCG taxed at higher rates than
LTCG
– CL offsets CG and then $3K of other income (e.g., salary)
 Watch out for wash sales (i.e., purchases of SISS within the 61-
day window period)
• Gifts
 Better to sell the asset and recognize the loss because losses
cannot be transferred
– Then, give or donate the sales proceeds to your favorite charity or
family member/friend
– This provides a double tax benefit – tax-saving capital loss and tax-
saving charitable contribution

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Individuals (cont’d)
 Opportunity Zone Investments
• Invest realized capital gain into a Qualified Opportunity
Fund (QOF)
 Only need to reinvest the capital gain, not the entire sales
proceeds
 Need to invest within 180 days of realization, s/t exceptions
 Defer realized capital gain until 12/31/2026, unless your interest
in the QOF is sold earlier
 Eliminate 10% or 15% of the deferred gain if a 5-year or 7-year
holding period in the QOF is met
 Eliminate 100% of gain on your interest in the QOF if it is held
for more than 10 years
 Not just a real estate play – it includes qualified opportunity
zone businesses
 Lots of nuance to these investments, so consult a qualified tax
advisor before going forward

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Section 1202 Stock
For certain C corporations satisfying an active
trade or business requirement, shareholders
that hold original issuance stock for more
than 5 years generally can be eligible to have
gain on the stock excluded from tax, to the
extent of the greater of $10 million or 10
times the original tax basis

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Individuals (cont’d)
 Take advantage of the $15,000 annual gift tax exclusion
to an unlimited number of donees (and married folks can
double up)
 Utilize a HSA if you have a high-deductible health
insurance plan
• 2019 HSA limit: $3,500 for individual coverage, and $7,000
for family coverage
• 2020 HSA limit: $3,550, and $7,100, respectively
 Convert traditional IRAs to Roth IRAs
• No longer have to worry about the modified AGI cap of $100K
• Best if you expect to be in a higher tax rate in retirement than
now
 Consider political environment and future tax rate changes
• Roth IRA protects your retirement savings against future tax
rate increases

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Year-End Strategies for Businesses
 Overview of landscape
• Corporate tax rate has been reduced to a flat
21% rate
• No corporate AMT
• Limits on business interest deductions
• Generous expensing and depreciation rules
• Noncorporate taxpayers with qualified business
income (QBI) from pass-through entities may be
entitled to a special 20% deduction

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Change Method of Tax Accounting
 More business are allowed to use the cash
method now
 Cash method taxpayers have flexibility to shift
income between tax years
• Defer invoices until next year
• Pay bills early
• Make prepayments
 To qualify as a small business, a taxpayer must
(among other things) satisfy a gross receipts
test
• Average annual gross receipts ≤ $26 million during
a 3-year testing period (2019) (up $1 million from
2018, indexed annually for inflation)

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§179 Expensing
 For tax years beginning in 2019, the expensing limit is $1,020,000, and
the dollar-for-dollar phase-out threshold is $2,550,000
 Expensing is generally available for most depreciable property (other
than buildings) and off-the-shelf computer software
 Expensing is available for “qualified improvement property”
• Includes any interior improvement to a building's interior, but not for
enlargement of a building, elevators/escalators, or the internal structural
framework
• Includes roofs, HVAC, fire protection, alarm, and security systems
 Many small- and medium-sized businesses may be able to make timely
purchases and be able to currently deduct most if not all their outlays
for machinery and equipment
 Not prorated, so expensing is permitted in 2019 even if asset is
purchased and placed in service on December 31, 2019

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100% Bonus First-Year Depreciation
 Bonus depreciation applies to machinery and equipment bought new or
used (with some exceptions) if such purchases are placed in service in
2019
• Includes tangible property with a depreciable period ≤ 20 years
• Percentage of depreciation scheduled to be reduced in 2023 and beyond
 Not prorated, so 100% deduction is permitted in 2019 even if asset is
purchased and placed in service on December 31, 2019
 No limitation or phase-out of deduction, as there is with §179
expensing
 Also, can create an overall loss, unlike §179
 Commercial real estate QIP placed in service after 2017 – intended to
be covered, but due to drafting error, is not covered (i.e., no bonus
depreciation and 39-year depreciation applies)

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Qualified Business Income

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QBI at a High Level
 20% deduction for qualified business income received from a
relevant pass through entity (RPE), including a sole
proprietorship
 For those with taxable income in 2019 under $321,400 for
married filers ($160,700 for other filers), the 20% deduction
applies to all qualified trade or business income
 For those with taxable income in 2019 over $421,400 for married
filers ($210,700 for other filers), two separate limitations apply:
• No deduction for SSTBs (generally health, law, accounting,
consulting, financial services, performing arts, investing and
investment management, and any business whose principal asset is
the reputation or skill or one or more of its employees)
• Deduction is limited to the greater of the wage limitation or the
property limitation (see next page)
 For those with taxable income between the above thresholds,
phase-our rules apply

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QBI High Level (cont’d)
 Key limitations for many businesses – the
greater of:
• Wage limitation – 50% of wages; or
• Property limitation – 25% of wages + 2.5% of
UBIA (generally the unadjusted basis
immediately after acquisition of depreciable
property used in the business for which the
depreciable period has not ended)

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Y/E Planning Around QBI
 If TI exceeds a certain threshold amount, then QBI deduction
may be limited depending on the following factors:
• Whether the taxpayer is engaged in a Specified Service Trade or
Business (such as law, accounting, health, or consulting);
• The amount of W-2 wages paid by the business; and
• The unadjusted basis of qualified property (such as machinery and
equipment) held by the business
 Consider planning around these limitations, which may involve:
• Deferring income to 2020;
• Accelerating deductions into 2019 (e.g., institute defined benefits
plan); or
• Increasing wages in 2019
so as to come under the dollar thresholds (or be subject to a smaller
phaseout of the deduction) for 2019

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Y/E Planning Around QBI (cont’d)
 Crack-and-pack strategy does not work
• I.e., separating operations or property of a SSTB to try and get
QBI for the separated items
 UBIA is sometimes low in real estate holding partnerships
and this can limit the QBI deduction
• E.g., older property that has appreciated in value or one that is past
the depreciable period
• Consider moving wages from the management company to the
entity that owns each property (e.g., maintenance workers)
• Aggregating the management company with the R/E entity can
maximize deductions but only if common ownership tests are met
 UBIA is a year-end test, so defer an asset sale until after year-
end if you are relying on the asset to increase your property
limitation

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Y/E Planning Around QBI (cont’d)
 Wages are not QBI to the owners of a closely-held business
• Reducing wages will increase net income; resulting net income to
owners is QBI eligible
• Alternatively, increasing wages, such as with a year-end bonus, can
maximize the deduction in some cases
• Guaranteed payments and proprietor draws are not salaries for
purposes of the wage limitation
 Where the wage limitation applies, 2/7th is perfect ratio for
wages/NI before wages to maximize the QBI deduction
• If income before wages is $700, pay $200 in wages so that $200 x
50% wage limitation = $100 and $500 x 20% QBI deduction = 100.
Limit on wages equals QBI amount
 no excess wage limitation and maximized QBI deduction

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Business Interest Expense Limitation –
§163(j)

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§163(j) at a High Level
 Every business, regardless of legal entity, is
subject to disallowance on its net interest
expense to the extent it exceeds 30% of
adjusted taxable income (ATI)
• For tax years beginning before 1/1/2022, ATI =
business income without deduction for
depreciation, amortization or depletion
• Net interest expense = business interest
expense in excess of business interest income

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§163(j) at a High Level (cont’d)
 Exceptions
• Small business exception – average gross receipts ≤
$26M
 Gross receives are aggregated in the case of certain
commonly controlled businesses
 Not available for “tax shelters,” which is broadly defined
• Election out
 E.g., real property trade or business or farm business
 Cost of the election is that the business is required to use
the Alternate Depreciation System (ADS), which generally
slows down depreciation (longer lives and straight-line
method)
 If use ADS, cannot take bonus depreciation

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Y/E Planning Around §163(j)
 Consider whether income is business
income vs. investment income
• For §163(j), entities prefer business income
because it increases the ATI limitation
 E.g., interest on A/R is business income
• Look into all interest on trial balances to see
where it comes from

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Questions?
 Daniel Mayo, JD, LLM, Principal
 Dominick Salerno, CPA, Tax Manager