|2017 Year-End Tax Planning for Businesses
Year-end planning is a bigger challenge this year than in past years. As you may have heard, the ‘Tax Cuts & Jobs Act’ is tax reform legislation that has recently been proposed, but will likely not be enacted until the 2018 tax year if approved. As the proposal is likely to go through many changes before it becomes law, we will be providing you with a detailed summary of changes that may affect your business as the proposal goes through the process. The proposal is highlighted by changes in business tax rates for 2018 and beyond including the following:
- Certain pass-through business entities would be taxed at a flat 25% rate on a portion of their income;
- Corporations would be taxed at a flat 20% rate and personal service corporations would be subject to a flat 25% corporate tax rate; and
- Bonus depreciation of 100% would be allowed on the purchases of new and used capital asset purchases, and Section 179 expensing would be greatly expanded.
As the ‘Tax Cuts & Jobs Act’ has not yet been approved, the current proposal is not a reliable means with which to plan for the 2018 tax year. This has created a great amount of uncertainty with regards to what your businesses tax liability may look like in 2018, further complicating last-minute moves that you may want to consider as year-end approaches for the 2017 tax year.
Below we have compiled a list of items that may be helpful if taken into account before the end of 2017, which may help save or defer taxes. Due to the uncertainty surrounding tax reform, we ask that you please review the following list and contact us to discuss the benefit and/or your eligibility before taking any action.
- Note bonus compensation deductions for accrual method firms may be limited. Firms’ 2017 accrued bonuses deferred to 2018 can’t be deducted if they are payable to owners of more than 50% of a regular corporation’s stock or owners of any interest in an S-corporation, personal service firm, or partnership.
- Set up a self-employed retirement plan if you are self-employed and haven't done so yet. Consideration can be given to other forms of retirement planning and applicable funding requirements that may best suit your needs, the needs of the organization, and its employee(s).
- Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. A partner's share of a partnership loss is deductible only to the extent of their partnership basis and his or her share of certain partnership debt as of the end of the partnership year in which the loss occurs. An S corporation shareholder can deduct his or her pro rata share of an S corporation's loss only to the extent of the total of his or her basis in (a) his or her S corporation stock, and (b) debt owed to him or her by the S corporation.
- Businesses can consider making expenditures that qualify for the first year business property expensing option under IRC Section 179. For tax year 2017, the expensing limit is $510,000 and the investment ceiling limit is $2,030,000. A limited amount of expensing is allowed to be claimed for computer software and qualified real property (qualified leasehold, retail, and restaurant property).
- Businesses also can consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. The timing of strategic capital asset purchases can continue to be a valuable tax planning tool, but gauging when it will be the MOST beneficial for tax purposes is not clear for the 2017/2018 tax years. Currently, the bonus depreciation rate is set to decrease to 40% in 2018, however this may be increased under the currently proposed tax reform package.
- Incur qualified research expenses before the end of the year that qualify for the research tax credit. Although this tax provision was made permanent, the effects of deferring these expenses to 2018 on your taxes are uncertain due to possible tax reform.
- Expenses related to the business use of vehicles of 50% or more can add up to major deductions. If your business could use a large vehicle, consider purchasing a vehicle weighing more than 6,000 pounds. Up to $25,000 of the cost of an oversized vehicle can be expensed immediately, in additional to bonus depreciation. Vehicles weighing less than 6,000 pounds are subject to further limitations. Be sure to track your business use mileage and document evidence of expenditures such as receipts and canceled checks for any vehicle used for business. The vehicle must be used more than 50% each year for business purposes to qualify for tax benefits. As a helpful tip, consider using a phone app specifically designed to help keep these records.
- Qualified small employers that do not offer a group health insurance plan should consider a “Qualified Small Employer Health Reimbursement Arrangement” (QSEHRA). This new development allows certain employers with less than 50 employees to reimburse employees for health insurance and medical care expenses pre-tax up to $5,050 for individuals and $10,250 for families in 2018. Please contact us if you would like to discuss whether you qualify to set up a QSEHRA.
- Owners of closely-held businesses should be on the watch for reasonable compensation and constructive distributions. There have been recent Court cases addressing a variety of issues including transactions between related companies such as wholly owned subsidiaries paying management or consulting fees to related entities, C-corporations paying personal expenses of shareholders that may be taxable as dividends, and determining the correct business entity for which expenditures should be reported for tax purposes. Please contact us if you would like guidance regarding any of these items.
- If your business or rental property was affected by natural disasters in 2017, you may be eligible for tax relief. Please contact us to discuss whether you qualify as an affected taxpayer and what kinds of relief you may be eligible for.
A review of overall net taxable income to the company and/or its partners or shareholders may be useful to determine potential options to minimize exposure to certain adverse individual tax provisions (e.g. additional Medicare 3.8% surtax, Pease limitations on itemized deductions and personal exemptions, the net investment income tax, etc.) and to create a larger picture of the cost to the company or related parties in relation to employment taxes, income taxes, and other taxes incurred annually.
As the year comes to a close, it is important for you to consider what your estimated tax liability may be for 2017.If you anticipate significant changes in your taxable income, please contact us to discuss whether making or adjusting a 4th quarter estimated tax payment may be necessary in order to avoid any underpayment of estimated tax penalties.
We recommend that you take the uncertainty regarding potential tax reform changes into careful consideration while investigating your 2017 year-end planning options. These year-end steps are a sample of ideas to save or defer taxes and should give you some insight into your options for 2017. You should investigate these and other options thoroughly before initiating action. We are happy to discuss these with you and tailor a tax saving plan that will work best for you; please contact us with any questions you may have.