Depreciation and Expensing
The Tax Cuts and Jobs Act (TCJA) provided very generous depreciation and expensing limitations. Businesses may want to take advantage of 100-percent first-year depreciation on machinery and equipment purchased during the year. Additionally, Code Sec. 179 expensing has an investment limitation of $2,590,000 for 2020, with a dollar limitation of $1,040,000.
IMPACT.
These provisions do not apply to 2020 only, so there is time to take advantage of them in later years. However, if a business has been considering expanding capacity or acquiring new equipment, there has never been a better time to do so than in 2020, from a tax benefit standpoint.
Additionally, the CARES Act corrected a longstanding error from the TCJA by categorizing qualified improvement property as 15-year recovery property. The effective date of this fix to the so-called “retail glitch” is for property placed in service after 2017, thus it was retroactive for 2018 and 2019.
IMPACT.
Again, these provisions do not apply to 2020 alone, so there is not necessarily and end-of-year deadline to implement any changes. Nevertheless, the opportunity is there in 2020. In order to take advantage of the retroactive nature of the provision, there are specific rules relating to amending returns and accounting method changes that must be followed.
Charitable Contributions
The CARES Act also increased the limitation on corporations’ deduction for charitable contributions from 10 percent of taxable income to 25 percent of taxable income. However, this increase is limited to the 2020 tax year only.
Business Interest Deduction Limitation
The CARES Act also increased the business interest deduction limitation from 30 percent to 50 percent of adjusted taxable income for 2019 and 2020. The TCJA introduced the limitation for tax years after 2017. The increase does not apply to interest paid after 2020. Specific rules apply in the case of partnerships.
IMPACT.
The increases of deduction limitations for both charitable contributions and business interest provide unique opportunities for businesses to reduce their tax bills, but action must be taken before the close of the year.
For more information about year-end tax planning for businesses, contact your CPA at Larson & Company.