|2018 Year-End Tax Planning for Businesses
Year end tax planning for the 2018 tax year may be more complex and challenging than in prior years. The most immediate advice we can provide is…. plan and be prepared.
The federal tax reform bill commonly known as the Tax Cuts and Jobs Act of 2017 (“Tax Act”) contained countless tax planning opportunities as well as pitfalls. Below we have compiled a list of items that may require you to take action before the end of 2018. Please review the following list and contact us to discuss the benefit and/or your eligibility before you consider taking any action to save or defer taxes. The tax implications with a number of Tax Act changes can be very complex and must be thoughtfully considered in advance.
- Accelerate depreciation deductions on capital investments: Businesses can consider investing in capital expenditures that qualify for 100% bonus first year depreciation if acquired and placed in service in 2018. Additionally, IRC Section 179 expensing thresholds have been increased to $1,000,000 annually phasing out at $2,500,000 in total assets placed in service in 2018. Although certain limitations still apply to vehicles (passenger autos) and industry specific capital projects (qualified retail improvement property), these provisions greatly expand most businesses’ ability to recover tax benefits from its capital investments immediately.
- 20% passthrough business deduction. Your business may qualify for a deduction equal to 20% of its taxable income. This new deduction of 20% of your “qualified business income (QBI)” from a partnership, S corporation, or sole proprietorship business is subject to many limitations. QBI does not include investment related income, reasonable compensation received from an S corporation, or guaranteed payments received from a partnership for services provided. It is further complicated by limitations placed on specified service trades or businesses, the total amount of wages paid by the business, and/or the total amount of unadjusted basis in the businesses’ assets. However, most taxpayers with taxable income below $157,500 (single) and $315,000 (married filing joint) will not be subject to these limitations and will qualify for the benefit. Careful planning and analysis is a must.
- Retirement contributions: Consider your ability to fund and to what level you can accrue future contributions to retirement accounts that qualify for a business deduction in 2018. If you haven’t done so already, consider establishing a retirement plan if you are self-employed. There are many retirement planning tools and applicable funding opportunities that may apply. Consideration needs to be given to which may best suit your needs, the needs of the organization, and its employee(s).
- Net Operating Loss limitation rules. Any Net Operating Losses incurred in 2018 will no longer be eligible to be carried back into prior tax years to request a refund. Net Operating Losses are required to be carried forward into subsequent tax years, are limited to 80% of taxable income, and do not expire.
- Excess business loss limitation rules. Beginning with the 2018 tax year, trade or business losses in excess of $250,000 for single taxpayers ($500,000 married filing a joint tax return) over the total amount of trade or business income will not be deductible in the current year. Instead, the excess is added to a Net Operating Loss and carried forward to the subsequent tax year.
- Corporate flat income tax rate. The C Corporation income tax rate is a flat 21%. Corporate alternative minimum tax was repealed and the punitive tax rates for Personal Service Corporations and Personal Holding Corporations no longer apply.
- Change in accounting method. The Tax Act offers good news to some taxpayers, allowing them a more favorable method of accounting for income tax purposes than was previously available to them. These beneficial changes to your business require action on your part.
- Accrual basis taxpayers may qualify now to use the cash basis
- Onerous uniform capitalization rules for inventory can now be avoided
- Required inventory capitalization rules have been relaxed
- Paid family and medical leave credit. Eligible employers paying for family and medical leave for its employees may qualify for a tax credit if the amount paid to employees on leave is at least 50% of their normal wages, the leave payments are made in employer tax years beginning in 2018 and 2019, and the payments are consistent with a written policy meeting specific conditions. The new credit is temporary and won't be available for employer tax years beginning in 2020 or later (unless Congress extends it).
- 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. 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. You may be able to contribute funds or make a loan to your company to allow a business loss deduction.
Other items to consider in year end planning
- Consider accelerating any expenses before year end to minimize overall taxable income.
- Consider any opportunities to defer income into January 2019.
- Corporations need to determine the amount of reasonable compensation they pay to officers annually, and consider the relationship to the amount of distributions/dividends incurred.
- Elimination of partnership “technical termination” rules if there is a more than 50% ownership change.
- Gains recognized on the sale of property can now only be deferred under IRC Section 1031 (under a qualified exchange) if it is real property (commercial or residential property or land).
- Determine any deductible accrued bonuses that may be payable in early 2019.
- Determine the company’s or individual partner’s/shareholder’s need to make estimated tax payments to avoid underpayment penalties.
Although we strive to provide you with applicable and valued tax planning opportunities, the magnitude of additional guidance yet to be received from the Internal Revenue Service, U.S. Treasury, and possibly from Congress in the form of technical corrections may be material. Additionally, uncertainty in year end tax planning cascades down to the states, most of which do not automatically conform to the changes in the federal tax laws. Therefore, subsequent developments changing the facts provided to us, or differences in the final federal or state regulations once they are issued by the applicable taxing authorities, may affect any estimate or advice we provide.
We are happy to discuss any of the above items with you further and tailor a tax strategy that will work best for you; please contact us with any questions you may have.