A new year is here, bringing new opportunities and tax strategies business owners should be aware of as a new filing season is approached.

Doeren Mayhew’s tax advisors highlight five key tax planning strategies to consider in 2020:

1. Economic Nexus Sales Tax

In June 2018, The U.S. Supreme Court ruled in favor of South Dakota in the South Dakota vs. Wayfair, Inc. case, confirming that states can assert nexus for sales and use tax purposes without requiring seller’s physical presence in the state (location in state or employee located in state) through economic nexus. The Supreme Court decision does not clearly describe the scope of economic nexus, but certain principles are clear. Economic Nexus can create a filing requirement based on sales revenue, transaction volume or a combination of the two.

Due to this ruling more than 40 states have established economic nexus laws of their own in the last year. Businesses conducting sales and e-commerce activity outside of the state in which they reside should explore their potential tax exposure.

2. Estate and Gift Planning

The estate and gift tax exemption for 2020 is $11.58 million per individual and $23.16 million for married couples filing jointly. The annual gift exclusion amount remains the same at $15,000. Unless Congress makes these changes permanent, the exemption will revert to $5.5 million (to be adjusted for inflation) after 2025, so now is an optional time to take advantage of this savings opportunity.

The Internal Revenue Service (IRS) has clarified that individuals who take advantage of the increased gift tax exclusion will not be adversely affected if the exemption is not made permanent after 2025. Be sure to work with a trusted CPA and attorney to maximize the increased exemption to ensure you’ve also addressed the size of the estate, as well as have updated estate and gift documents appropriately.

3. Partnership Tax Basis Capital Reporting

Partnerships are required to add tax basis capital information to Partner K-1s for any partner that had negative tax capital at either the beginning or the end of the year for 2018 are given until Mar. 15, 2020, to provide the information under IRS. Notice 2019-20. Partnerships will qualify for relief from being charged penalties under IRC 6722, 6698, and 6038 if the following conditions are met:

    • The partner Schedules K-1 are timely filed with the IRS, furnished to the partners and contain all required information.
    • The partnership files with the IRS—no later than 180 days after the six-month extended due date for the partnership’s Form 1065, or if a calendar year partnership, no later than Mar. 15, 2020—a schedule setting forth for each partner for whom the partnership is required to furnish negative tax basis capital account information:
      • The partner’s name, address, taxpayer identification number
      • The amount of the partner’s tax basis capital account at the beginning and at the end of the tax year at issue

It may not be readily apparent whether a partner in a partnership has negative tax basis capital. Consequently, it’s imperative for all partnerships that report capital accounts on K-1s on any basis other than tax basis to conduct an analysis to determine if negative tax basis capital exists. In most cases the analysis and preparation of the proper reports for the IRS will require significant time on the part of your tax advisors.

Failure to maintain compliance can result in a penalty of $195 per month per partner. However, partnerships that meet the four conditions  listed below are exempt from compliance:

    1. Total receipts in the tax year were less than $250,000
    2. Total assets at the end of the tax year were less than $1 million
    3. Schedules K-1 are filed with the partnership return and furnished to the partners on or before the due date (including extensions) for the return
    4. Partnership is not required to file a Schedule M-3

For 2019 partnership tax filings, partnerships will be required to disclose on the K-1s any partners with negative tax capital. On 2020 partnership tax years, the only method that can be used to report partner capital will be tax.

4. Entity Choice

The corporate tax rate was reduced to 21% with the passage of the Tax Cuts and Jobs Act (TCJA), leaving business owners to explore whether a change in entity choice was a favorable tax strategy for them. Furthermore, the corporate alternative minimum tax (AMT) was permanently repealed, while the individual AMT remained the same.

Pass-through entities with little distributions to the owners may want to consider switching to a C Corporation, but this is strongly dependent on your overall plans for business growth and exit timeline.

The new C corporation tax rate is permanent, but the QBI deduction sunsets at the end of 2025. Any dividend distributions from the C corporation to its shareholders continue to be subject to the qualified dividend rate and net investment income tax (23.8 percent maximum tax on dividends).

Additionally, C Corporation stock may qualify as Qualified Small Business Stock (QSBS) if certain requirements and holding periods are met:

    • The investor must not be a corporation.
    • The investor must have acquired the stock at its original issue and not on the secondary market.
    • The investor must have purchased the stock with cash or property or accepted it as a payment for a service.
    • The investor must have held the stock for at least 5 years.
    • At least 80% of the issuing corporation’s assets must be used in the operations of one or more of its qualified businesses.
    • Business that the C Corporation is in meets the definition of Qualified Small Business (QSB) as defined by IRC 1202

If the C Corporation stock qualifies then 100% of the capital gain related to sale of the stock can be excluded from tax however the amount that can be excluded from capital gains is limited to the greater of $10 million or 10 times the adjusted basis of the stock.

5. Qualified Business Income (QBI) Deduction

QBI from flow-through entities—including sole proprietorships, partnerships, or S-corporations—is generally eligible for a 20% deduction.  However, the deduction is not extended to owners of entities in certain industries—so-called “specified service trades or businesses”—except to the extent that their owners have taxable income below certain thresholds.  Specified service trades or businesses include any trade or business engaged in the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset is the reputation or skill of one or more of its employees, or that involves the performance of services that consist of investing and investment management, trading, or dealing in  securities, partnership interests, or commodities.

If dealing with a company that pay wages make sure that an adequate amount of wages is paid out so that the QBI Deduction is maximized. Also, aggregation may be determined at the individual level so it is important to discuss with your tax advisor as aggregation could be irrevocable.

Doeren Mayhew tax advisors work closely with businesses and individuals to assess their current tax position and offer proactive strategies that align with their overall goals. To identify tax opportunities relevant to you and your business, contact us today.