Plan Ahead to Get Ahead
Insights for filing 2020 taxes
Mark J. Cieri, CPA, CGMA, CVA
When dental laboratory owners think of their tax needs, they may only be thinking about the preparation and filing of their tax returns. The truth is that the tax return is the last step in a year-long process. There are many more tax saving and tax deferral options available to your laboratory if you plan ahead during the year than if you wait until you are preparing and filing your tax return.
Projection of Your Taxable Income
While you may know how your business is doing today and how it has done so far this year, it is important to take that information and project the activity you expect for the remaining portion of the tax year. Do you anticipate any increase in dental laboratory revenue before the year's end? How about any large upcoming expenses? Knowing the answers to these questions can give you the insight you need for what tax strategies are going to work best for your laboratory.
If you plan to purchase dental laboratory equipment or make laboratory upgrades soon, do so before the end of the year to take advantage of the tax deduction. For 2020, the depreciation rules under Internal Revenue Code Section 179 will allow a business to take up to $1,040,000 in immediate tax deduction if the total equipment purchases for the year are less than $2,500,000. However, the phase-out of the deduction begins after $2,590,000 of equipment is purchased. Also, in 2018, property eligible for Section 179 depreciation was expanded to include improvements to nonresidential real property for some interior improvements, roofs, HVAC, fire protection systems, alarm systems, and security systems.
In addition to Section 179 depreciation, bonus depreciation may be available to further reduce the laboratory's taxable income. Unlike Section 179, bonus depreciation has no taxable income limitation or limit on the amount of bonus depreciation that can be taken on qualifying property. Bonus depreciation can be 100% of the cost of qualified property placed in service before January 1, 2023. Some qualifying property for bonus depreciation includes assets with less than a 20-year recovery period, qualified improvement property, and computer software with a life of
The property can be new or used for the purposes of Section 179 and bonus depreciation. However, used property cannot be purchased from a related party or entity to apply to either depreciation.
Planning ahead will allow you to know if some of those equipment purchases or upgrades should be undertaken now, delayed to future years entirely, or maybe even broken up over multiple years.
While retirement plans offer an important employee benefit, they are also a great way to save on your current taxes.
A Simplified Employee Pension (SEP IRA) plan is widely available and easy to set up and maintain. It is funded strictly by employer contributions of up to 25% of eligible employee compensation or up to a maximum of $57,000 in 2020. The employer must contribute the same percentage to employee accounts in years the employer contributes to their own account.
A Savings Incentive Match Plan for Employees (SIMPLE IRA) is available to all types of entities with fewer than 100 employees. Employees may defer up to $13,500 of eligible compensation in 2020; employees over age 50 can make catch-up contributions of $3,000. The employer contribution is either a 2% nonelective contribution on behalf of all eligible employees or 100% match on the first 3% deferred by the employee; the match may be reduced to 1% in 2 years out of 5.
A traditional 401(k) plan is available to all types of entities. Employees may defer up to $19,500 of eligible compensation in 2020; employees over age 50 can make catch-up contributions of $6,500. Employers may make a matching contribution or profit sharing contribution up to 25% of compensation up to $37,500 (with a maximum of $57,000 from all sources, not including catch-up contributions).
A defined benefit retirement plan generally provides the largest deferral opportunity. The contribution amount is based upon the age, earnings, and years of service of the plan participants. There is no contribution limit with this plan, but it is also generally the most costly in terms of administering and funding. Setting up a defined benefit retirement plan also requires the laboratory to make a commitment to be in the plan for a minimum of 3 to 5 years.
While dental laboratory owners may be familiar with these retirement plans, there are additional plans or a combination of plans available that can allow even greater plan contributions and reduction in the laboratory's taxable income. It is possible to set up a combination of plans that result in a slightly higher increase in the cost of contributions for employees but can allow an owner to greatly increase their contribution to a plan. Consult with your tax advisor and retirement plan specialist for what plans work best for you.
Pay any laboratory employee bonuses before the end of the year instead of waiting until January. Ramp up expenses if you have elected to use the cash basis of accounting for tax purposes. Make your January expense purchases in December. Most vendors invoice on a regular billing cycle, but try calling your vendors and get additional short period invoices that you can pay prior to the year's end.
Do you have a tax loss this year? How about large unexpected deductions? If you do, and if you also utilize the cash basis of accounting for income tax purposes, now may be the time to collect some of those old outstanding receivables. It may even be the time to accelerate cash receipts on current work. Collecting the money from those sources while in a lower tax bracket will be beneficial to the laboratory.
Good tax planning always starts with a conversation with your tax professional. Implementing your 2020 tax plan now can only benefit your laboratory at filing time.
About the Author
Mark J. Cieri, CPA, CGMA, CVA, is a partner at Robin Kramer & Green, LLP, in Fort Washington, Pennsylvania.