Year-End Planning for Businesses
Business tax planning is very complex. Careful planning involves more than just focusing on lowering taxes for the current and future years. How each potential tax saving opportunity affects the entire business must also be considered. In addition, planning for closely-held entities requires a delicate balance between planning for the business and planning for its owners. As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next.
Presented below are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can provide a comprehensive review of the tax-savings opportunities appropriate to your particular situation.
First, review your accounting records, or have us check them, to make sure you have accurate information. Make sure your account reconciliations are complete and accurate, and review old outstanding items. Once you have a reasonably accurate net income amount, you can project to the end of year to determine what steps you might need to take.
You should also evaluate your net income position for 2018 with what you expect for 2019. You may want to accelerate or defer income or expense items to “smooth out” your income.
If you operate as a partnership or S-Corporation and anticipate a 2018 loss, evaluate your basis position to ensure maximum benefit from such loss. Through all of this, keep in mind that proposed tax laws may impact the tax rates applied to certain active business passthrough income.
Fixed Asset Depreciation Deductions
The first, and one of the most common methods, is timing of fixed asset purchases and evaluating options for depreciation and first-year expensing of fixed assets. Section 179 expensing limits are $1,000,000, (limited by net income and reduced by additions in excess of $2,500,000). The expensing is available for purchases of both new and used assets. In addition, purchases of new and used assets can qualify for 100% bonus depreciation if you have maxed out your 179 expensing. Both of these tactics are available regardless of when the property is placed in service during the year. The expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, 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.
Additionally, there are some safe harbor elections available that allow you to expense lower-cost assets and certain materials and supplies. The safe harbor level depends on whether or not you have audited financial statements. The elections should be in writing and in effect as of the beginning of the year.
Section 199A Deduction for Qualified Business Income
Tax reform lowered the corporate tax rate to a flat rate of 21 percent. In turn, the new legislation may create a new 20 percent deduction for “qualified business income” from sole proprietorships, S corporations, partnerships and LLCs taxed as partnerships. The new tax break is subject to some complicated restrictions and limitations. The deduction, which is available to both itemizers and nonitemizers, is claimed by individuals on their personal tax returns as a reduction to taxable income. For 2018, if taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers, the deduction may be limited based on whether the taxpayer is 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 machinery and equipment) held by the trade or business. The limitations are phased in for joint filers with taxable income between $315,000 and $415,000 and for all other taxpayers with taxable income between $157,500 and $207,500.
Business Meals and Entertainment
If you own a business, the deduction for the cost of entertainment is no longer allowed for 2018 and beyond as a result of tax reform. The IRS confirmed that businesses can generally continue to deduct 50 percent of the cost of business meals, including those incurred while meeting with or entertaining customers and clients.
Until proposed regulations are effective taxpayers may deduct an otherwise allowable business expense if:
- The expense is an ordinary and necessary expense under Section 162(a) paid or incurred during the taxable year in carrying on any trade or business.
- The expense is not lavish or extravagant under
- The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages.
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact.
In the case of food and beverages provided during or at an entertainment activity, the food and beverages must be purchased separately from the entertainment, or the cost of the food and beverages must be stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
Accounting Method Reform and Simplification
The new tax law expands the ability for a “small business” to use various accounting methods. To qualify as a “small business”, a business must satisfy the gross receipts test. The gross receipts test is satisfied if, during a three-year testing period, the average annual gross receipts of the business do not exceed $25 million a year. Accounting methods now available include:
- The cash method of accounting rather than the accrual method
- Inventories no longer have to be capitalized, but may be expensed as significant materials and supplies
- For those businesses that continue to use inventories, there is no longer a requirement to capitalize the costs of maintaining and managing inventory (Section 263A costs).
Tax Obligations and Opportunities under Wayfair
On June 21, the Supreme Court of the United States issued its widely anticipated decision in Wayfair, allowing states to impose a tax payment or tax collection obligation on out-of-state business, regardless of whether the business has a physical presence in the state. While Wayfair dealt with remote seller sales and use tax collection obligations, states may now tax a business even if the business has no in-state physical presence. Overnight, remote sellers, licensors of software, financial services, franchisors, and other businesses that provide services or deliver their products to customers from a remote location must start complying with state and local taxes. Left unchecked, these state and local tax obligations and correlated liabilities from tax, interest, and penalties will grow over time. A business is likely impacted by Wayfair if any of the following apply:
- The business makes sales into states in which it is not registered or filing sales/use tax returns.
- The business ships goods or provides services to customers located in states where it has little or no in-state physical presence.
- The business makes retail sales of tangible goods.
- The company provides online services or makes sales of digital goods.
- The business licenses software or provides access to software.
- The business received a “nexus questionnaire” or received audit or tax notices from any state where it is not currently registered for sales/use taxes.
Businesses for which any of the above apply should take steps to minimize potential exposures from tax, interest, and penalties that may arise from Wayfair, and plan around the very fluid state changes that are happening and will occur in the near future. Please contact us to discuss if you do business with customers in more than one state.