Year End Tax Planning Ideas

It’s that time of year again. We’re past Thanksgiving, into December and the year is almost over. For a lot of business owners a familiar feeling is starting to set in. It’s panic. They’ve just seen the latest numbers (hopefully they look good), and the first thing that pops in their head is how can they lower their tax bill. There’s still a few weeks before year end, so here are some things for your transportation company to consider.

Utilizing the Cash Method of Accounting

Utilizing the cash method of accounting to defer income and accelerate deductions. I would venture most pass-through transportation companies are on the cash method of accounting. This can allow for businesses to defer the income on their accounts receivables and accelerate deductions by paying down liabilities or prepaying for certain items prior to year end. If you aren’t currently utilizing the cash method of accounting, you may be able to make an election to utilize it by making an accounting method change (there are some specific change procedures for transportation companies).

State Pass-Through Elections (PTEs)

For the last few years, state payments have been a hot button issue since the TCJA limited the deduction for taxes (state taxes, real estate taxes, etc) to $10,000. As a workaround to this, a few states had created pass-through entity taxes in order to shift the tax from the individual to the business (partnership or S Corporation). In late 2020, the IRS came out with Notice 2020-75 and essentially blessed these workarounds. So far over 20 states have fully passed a workaround with many more still working a bill through the legislative process. Here is an article that I wrote back in June that can walk you through how these PTEs can help lower your tax bill.

Other Business Items to Consider

In the past, transportation companies have been able to talk to their equipment dealer and make some purchases in late December to lower their tax bill. In our current environment, it’s almost impossible to do that (with either new or used equipment). However, if a taxpayer could find some equipment, they could fully write it off with bonus depreciation or Section 179 expensing.

If you’ve done a renovation, construction project, or done a building acquisition lately, it’s likely that you could find a benefit in a cost segregation study. These engineering studies break down the building components to allow taxpayers to take advantage of shorter tax lives, which can allow you to potentially write off some of the investment in the current year.

Don’t forget about the variety of lucrative tax credits that are still available to taxpayers. There are always the Federal and state fuel tax credits as well as the work opportunity tax credits (WOTC) for hiring eligible employees. We’ve seen an increased amount of research and development tax credits (R&D) for transportation companies lately as they’ve made big investments into technology and software.

Individual Items to Consider

One of the standard year end tax planning strategies has always been to harvest some capital losses to offset any capital gains. However, with the stock market at record highs some portfolios may not have capital losses to harvest.

Investing in an opportunity zone fund is also a great way to defer capital gains, and has other great benefits as well. Here is an article explaining how the investment works, the deferral of the capital gain, the stepped up basis and how you can potentially pay no tax on the appreciation on the investment if held for 10 years. The big key to an opportunity zone is making sure you choose the fund wisely as it is still an investment.

Making charitable donations is always a flexible year-end planning strategy as you can make a large donation at the end of the year and deduct it (as long as you are itemizing; otherwise non-itemizers are allowed a $300 deduction for single or $600 deduction for married filing jointly). A popular strategy the last few years has been contributing to a donor advised fund. This allows a taxpayer to take a large charitable donation in 2021, and the funds can be distributed to your charity of choice over the next handful of years.

Potential Law Changes

The typical tax planning strategies of deferring income and accelerating deductions may be in question this year. With the House having already passed a Build Back Better bill, and the Senate looking to pass the bill by Christmas we should consider the implications of what the tax environment will look for 2022 and beyond. While the corporate and individual tax rate increases were pulled out of the draft bill, there are a few things that you should consider when tax planning this year.

The draft bill expands the tax base of the Net Income Investment Tax (NIIT). NIIT is a 3.8% tax that has historically only been subject on passive income for taxpayers with more than $250k of adjusted gross income (AGI) for married filing joint filers. The draft bill would expand the the tax to essentially all income that is not subject to self employment tax (for single filers with taxable income over $400,000 and joint filers with taxable income over $500,000). This would mean that pass-through income from S Corporation or partnerships could be subject to an additional 3.8% tax. So for example, if a taxpayer were able to defer $1,000,000 in 2021 into a future tax year, it could cost them an additional $38,000 in tax.

One of items in the draft bill that could impact taxpayers is the surcharge on high income individuals, estates, and trusts. This surcharge would be a new tax equal to 5% of a taxpayer’s modified adjusted gross income (MAGI) in excess of $10,000,000, and an additional tax of 3% of a taxpayer’s MAGI in excess of $25,000,000.

So taxpayers who consistently have MAGI in excess of $10,000,000 may want to take a different tax planning approach this year. They may want to look to accelerate income and defer deductions for 2021. This would potentially allow them to save 8.8% (3.8% NIIT and 5% surcharge, and potentially up to 11.8% if MAGI would exceed $25,000,000) on any income accelerated into 2021.

Over the last six months, there has been a lot of talk related to gift and estate changes. Things like reducing the lifetime estate exemption limits, increasing the estate tax rates, and proposing changes to certain trusts (such as eliminating valuation discounts). Even though these items were eventually pulled from the House’s Build Back Better bill, it gives us some insight as to how things may look in the future and shows it’s never too early to state estate and succession planning.

How can we help?

Consider your personal tax situation before you implement any of these strategies. Everyone’s situation is different. CLA’s transportation and logistics professionals can help whether you need a short consultation or full support throughout the process.