In horse racing, the competition is not over until the horse crosses the finish line.
The same goes for maximizing your tax deductions and minimizing your taxes.
For those who think it’s too late to start saving your 2020 taxes, we are here to tell you it’s not!
With over 40 years of experience saving taxes for our customers and our knowledge of the new tax laws, we are confident that the following information will help you move closer to the 2020 home track and enable you to win a winner.
Current tax law and what it means for the horse industry
The current tax law includes favorable developments for the depreciation and expense of yearlings, breeding animals, farm implements and other property.
Bonus depreciation: By increasing the bonus depreciation, the depreciation can be increased from 50% to 100%. Accordingly, you are now allowed to spend all of your first year purchases on yearlings, breeding animals, and farm implements. Used property can now also qualify. There are still a few weeks left for the 2020 asset increase with the potential benefit of a full tax write-off.
IRC & 179 Deduction: The maximum amount that can be recognized as an expense has been increased from $ 500,000 to $ 1 million. The exit threshold has been increased from USD 2 million to USD 2.5 million.
Agricultural equipment: the useful life has been reduced from seven to five years and now the 200% decreasing balance method can be used.
Racehorses: Certain Thoroughbreds can still be written off as three year property.
Even if business equipment (or horses) are purchased before the end of the year, they are still entitled to these tax benefits.
Tax planning strategies for the end of 2020
Due to the transition of administration in the capital of our country and the uncertainty about whether the proposed changes to tax law are imminent or not, year-end tax planning for 2020 is more important than ever.
Steps available to individual taxpayers
- Capital Gains: President-elect Biden is proposing an increase in capital gains for taxpayers over $ 1 million from 20% to 39.6%. Therefore, if you are considering a sale of horses or real estate, you should consider expediting the transaction to 2020 instead of waiting until 2021.
Even for taxpayers on incomes below the $ 1 million threshold, if you made capital gains and unrealized losses in 2020, you may want to trigger those losses before the end of the year to offset your gains and thereby reduce your tax liability.
On the other hand, if you have realized losses, consider some gains as the capital loss deduction is capped at $ 3,000 in any given year.
- Retirement Plan Alerts: Recent tax laws include several relief measures to help those nearing retirement or who have financial concerns.
First, the required minimum distributions for 2020 will be suspended. So, unless you have a financial need to make a distribution in 2020, you don’t have to. Leave the money in the pension fund and let it continue to grow in value tax-free.
Second, Plan participants who turn 70 1/2 years old in 2020 or later will not have to make the required distributions until the year they turn 72 years old.
Third, you are now allowed to contribute to a traditional IRA after age 70 as long as you have earned an income.
Fourth, there is no 10% early withdrawal penalty for distributions of up to $ 100,000 from company retirement plans to those who either become ill or lose their jobs. These distributions can be spread over three years, and individuals can reassign all or part of them to avoid penalties.
Fifth, contributions to a Keogh or 401 (k) plan for an individual can be substantial and save you significant 2020 tax dollars if they are set up before December 31, 2020.
A SEP-IRA is another flexible alternative. A SEP can be set up prior to the completion date of your 2020 tax return but will still give you a 2020 deduction.
- Avoid underpaying the estimated tax penalty: If you haven’t made an income tax projection for 2020, this should be done by your advisor. If your 2020 forecast shows a balance due, request that a disproportionate amount of withholding tax be deducted from your December paychecks, year-end bonus, or retirement plan distribution, rather than a comparable substantial amount with an estimated fourth quarter tax credit to pay.
This withholding tax approach is cheaper than writing a check, as taxes withheld in December are considered “thrown back” and are treated as evenly distributed over the calendar year. This way, you can catch up on any deficits and still avoid a penalty for the first three quarters.
- Net Operating Losses (NOLs): The latest tax legislation temporarily lifts the rules enacted in 2017 that exclude the withdrawal of NOLs. Individuals with NOLs who occurred in 2018, 2019, and 2020 can now carry their NOLs back five years.
Significantly, business losses capped at $ 250,000 for individual taxpayers and $ 500.00 for joint tax returns can be deducted without limitation until 2020!
- Maximize Pass-Through Business Income Deduction: This tax deduction allows certain taxpayers to deduct 20% of their qualified business income. To maximize the deduction, you should take steps to qualify your taxable income to be below the exit thresholds of this new provision.
Steps available for corporate taxpayers
- Tax treatment of losses: Companies can repatriate NOLs at least for losses incurred between 2018 and 2020. Changes in tax regulations in December 2017 had stopped this practice. The latest tax legislation restores this benefit and the withdrawal period is five years. Another temporary change is that companies can now use NOLs to offset all of their taxable income through the 2020 tax year. The 80% limit of the Tax Act 2017 has been temporarily lifted.
- Maximum Available Depreciation: Companies should consider incurring expenses that qualify for 100% bonus depreciation in the first year. In general, both new and used depreciable assets are eligible. Full first year depreciation is allowed even if the asset is purchased at the end of the year and even if the deduction results in a taxable loss.
Also, make sure you take a bonus write-off on all eligible assets. Often times, assets related to lease enhancements are overlooked in horses purchased abroad or horses that have been trained but not yet driven.
An alternative is Section 179 depreciation, which has raised the 2020 cost cap to $ 1,040,000 if capital purchases do not exceed $ 2,590,000. Note that the expenses according to § 179 cannot cause a loss.
- Qualified Business Income Deduction (QBI): Certain business owners may be eligible for a deduction of up to 20% of their qualified business income. You should take all possible steps to keep your taxable income below the exit thresholds. The rules are complex. You should therefore contact your tax advisor so that you can make optimal use of the QBI deduction.
Possible changes in tax law proposed by the Biden administration
The best way to sum up President-elect Joe Biden’s tax plan would be to say that he wants to collect taxes on high-income households and businesses.
- Increase the corporate tax rate: The existing tax plan lowered the corporate tax rate from 35% to 21%. While Biden’s camp generally agrees that 35% was too high, her suggestion is to raise it to 28%.
- Increase taxes for high earners: Biden would restore the top tax rate of 39.6% in effect prior to the 2018 tax year.
- To allow the pass-through deduction to expire: Biden would phase out the 20% Qualified Business Income (QBI) deduction for taxpayers earning $ 400,000 or more.
- Increase in capital gains tax for high earners: Currently, capital gains enjoy lower tax rates than normal income, but Biden’s proposal would change that for taxpayers earning more than $ 1 million.
- Increase social security taxes: Biden would increase Social Security revenue by adding 12.4% wage tax (half of which is paid by the taxpayer) to any income above $ 400,000 in addition to the current structure of the tax.
- Changes in estate planning: This part of the proposed plan is less straightforward. On the one hand, you reduced the inheritance tax exemption of $ 11.58 million by 50%. On the downside, there is less clarity on key points like an increase in base, exemptions from corporate assets, capital gains, etc.
It is clear that changes, adjustments and additions will be made during the negotiation period before changes are implemented. Also note that it is highly unlikely that new laws will be enacted retrospectively to 2020. Our best advice is to maintain an open line of communication with your tax and financial advisors before making any updates to your estate planning.
The Green Group welcomes the opportunity to discuss your tax saving strategies with you by the end of 2020 by calling 732.634.5100. In the meantime, stay healthy.