As the tax year wraps up, businesses still have time to realize deductions and prepare for new changes coming in 2020.
As the year draws to a close, tax experts say now is a good time for businesses to look for opportunities to mitigate tax that may be due ahead of closing out their books for 2019, as well as get prepared for new taxes in 2020.
Last year was the first time that businesses were faced with the full force of changes to the federal tax code from the Tax Cuts and Jobs Act of 2017, the most comprehensive tax law change since the 1980s.
“Now is a perfect time to step back and figure out what we learned as tax advisors from going through this process last year,” says Justin Eckley, partner at accounting firm Moss Adams.
The new federal tax legislation was a big windfall for businesses, lowering the corporate tax rate to 21% from a maximum of 35%.
The law also brought down the tax rate for so-called pass-through businesses, which are typically organized as limited liability companies or partnerships. It reduced the top tax rate an individual pays on earnings from their pass-through business to 29.6% from 39.6%.
As part of the new code, businesses can mitigate federal tax before the end of the year that they may not be aware of. Here are a few highlights:
• An important change to the tax law allows companies to claim a deduction on the full cost of a large capital expenditure they make in a given year. Types of capital expenditure include money spent on machinery equipment or office furniture.
Beforehand, businesses had to take a portion of the deduction to reduce taxable income in future years. Under the new law, companies can expense 100% of the capital expenditure in the year they make that investment.
“If companies are having a great year and making a lot of profits, and they are looking at purchasing new equipment in the next three to six months, it may make sense to accelerate that purchase before the end of the year so they can take advantage of that tax deduction this year instead of next year,” says Eckley.
• Many corporate taxpayers are not aware of a change to the federal tax code that applies to businesses that are headquartered in the U.S. but sell products and services overseas. These companies can claim a 20% deduction on so-called qualified export income.
This can reduce the corporate tax rate they are paying even below 21%, says Eckley. “It is a big benefit for companies that are headquartered in Oregon but are doing business abroad,” he says.
• By the same measure, companies that have foreign subsidiaries in countries that have low taxation now have to pay tax on income earned in those overseas operations.
Under old rules, businesses didn’t pay tax on income earned in foreign locations unless businesses brought that cash back to the U.S. in the form of a dividend. The new law is designed to prevent companies from parking highly valuable assets in low-tax jurisdictions.
Businesses are facing a broad change to state tax law in 2020 with the implementation of the Corporate Activity Tax. The new charge, which is expected to raise $2 billion for education spending, comes into effect on Jan. 1, 2020. The first payments are due in April next year.
The new law imposes a levy on gross receipts, or sales of products or services. Because Oregon has never had a sales tax, “it may not be on people’s radar,” says Eckley.
“It is something that should be top of mind with companies and how they approach that with customers. Are companies going to increase fees to cover the costs? Are they going to add tax cost into the bottom line?”
Another change impacting Oregon businesses is the adoption of a tax on sales made by businesses that do not have a physical presence in the state where the sales take place.
The new tax, which has been adopted by 42 states, was the result of a United States Supreme Court ruling in South Dakota v. Wayfair in June 2018.
That decision says that states can mandate businesses must collect and remit taxes on transactions even if they do not have stores or offices in the state.
“Companies with e-commerce sites selling to customers in the U.S. should consider where they have sales and whether they need to remit sales tax,” says Eckley.
“Each state has its own rules. You have to understand where you are doing business and what sales thresholds you are looking at.”
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