As the end of the year approaches, it is a good time to think of planning strategies that will help lower your tax bill for this year. Year-end planning for 2018 takes place with the new tax law (the Tax Cuts and Jobs Act) that makes major changes to the tax laws for businesses - corporate tax rate is cut to 21%, corporate alternative minimum tax (“AMT”) is gone, new limits on business interest deductions, and significantly expanded expensing and depreciation rules. There is also a new deduction (the qualified business income deduction) for non-corporate taxpayers with qualified business income from pass-through entities or sole proprietorships.
Year- End Tax- Planning Ideas for Businesses & Business Owners
Qualified Business Income Deduction - For tax years beginning after 2017, taxpayers other than C-corporations may be eligible for a deduction of up to 20% of their qualified business income. If your taxable income exceeds $315,000 for a married couple filing jointly ($157,500 for all other taxpayers), the deduction may be limited based on whether the you are engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as real or personal property) held by the trade or business. It's important to consult your tax advisor regarding this new deduction since there are many limitations and exclusions.
Utilizing the Cash Method for Accounting - More "small businesses" can now use the cash (as opposed to accrual) method of accounting in 2018. To qualify as a "small business" a taxpayer must pass a gross receipts test. Effective for tax years beginning after December 31, 2017, the gross-receipts test is met if during the three prior tax years average annual gross receipts don't exceed $25 million (this dollar amount was $5 million for years prior to 2018).
Increased Depreciation Expensing Limits - Businesses should consider making expenditures that qualify for the new Section 179 limits. For tax years beginning in 2018, the expensing limit is $1,000,000, and the investment ceiling limit is $2,500,000. The expensing deduction is not prorated for the time that the asset is in service during the year. Property acquired and placed in service in the last days of 2018, rather than at the beginning of 2019, can result in a full expensing deduction for 2018.
Furthermore, the definition of Section 179 property was expanded to include roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; and security systems. The deduction is only available, however, for improvements made to nonresidential real property after the date such property was first placed in service.
Bonus Depreciation - Businesses also can claim a 100% bonus first-year depreciation deduction for machinery and equipment (either new or used (with some exceptions)) if purchased and placed in service this year. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are placed in service for only a few days in 2018.
There are also other tax law changes established by the Tax Cuts and Jobs Act to be mindful of during year-end planning for 2018.
Limitation of Business Interest Expense - Business interest is limited to 30% of the company’s adjusted taxable income for tax years beginning after Dec. 31, 2017. Companies that meet the $25 million gross receipts test, however, are exempt from this limitation.
Entertainment Expense Limitation - Starting in 2018, deductions for entertainment expenses are disallowed, and the current 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria or otherwise on the premises of the employer.
Like-Kind Exchange Limited to Real Property - The new law limits the nonrecognition of gain for like-kind exchanges to real property that is not held primarily for sale. Therefore, effective January 1, 2018, any gain from the trade-in of personal property (i.e. equipment and vehicles) will be taxable. However, under a transition rule, the exchange of personal property would still qualify for like-kind treatment provided the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before December 31, 2017.
S Corporation vs C Corporation - Another key point to consider is whether you should convert your company from an S corporation to an C corporation or vice versa given the new corporate and individual tax rates included in the tax law. Each company’s facts are different so please consult your tax advisor to determine which option is best for you.
These are just some of the year-end steps that can be taken to save taxes. Please contact your MarksNelson advisor at 816-743-7700 to discuss how to best plan for your business needs.