|There is still time for business owners in Maine and elsewhere to significantly reduce their tax bills for 2018. Taking the changes included in the Tax Cuts and Jobs Act (ACJA), here are seven year-end moves to consider:
1. Claim 100% Bonus Depreciation for Asset Additions
Thanks to the TCJA, first-year bonus depreciation of 100% is available for qualified new and used property acquired and placed in service in calendar year 2018. This may allow your business to write off the entire cost of some (or all) of your 2018 asset additions on this year’s return.
This is not subject to any spending limits or income-base phase out thresholds, but the program itself will be gradually phased out starting in 2023 unless Congress extends it.
Look at buying extra equipment, furniture, computers, or other fixed assets before the end of the year. Filler & Associates is available to explain what types of assets qualify for this break.
2. Claim 100% Bonus Depreciation for a “Heavy” Vehicle
Heavy SUVs, pickups, and vans used over 50% for business are treated as transportation equipment for tax purposes. As such, they qualify for 100% bonus depreciation.
To be specific, bonus depreciation is available when the SUV, pickup, or van has a manufacturer’s gross vehicle weight rating (GVWR) more than 6,000 pounds. You can confirm a vehicle’s GVWR by checking the manufacturer’s label, which is generally located on the inside edge of the driver’s door (where the door hinges meet the frame).
If your business is in need of a vehicle that meets these requirements and you can place it in service before the end of this tax year, you could get a big write-off on your 2018 tax return.
3. Cash in on More Generous Section 179 Deduction Rules
For qualifying property placed in service in tax years starting with 2018, the TCJA increased the maximum Sec. 179 expensing amount to $1 million. (Under prior law, the limit was $510,000 for tax years beginning in 2017.)
There are other beneficial changes to the Sec. 179 expensing rules thanks to the TCJA including:
Property used for lodging. The TCJA repealed the prior-law provision that excluded expensing personal property used to furnish lodging from Sec.179. So eligible property now qualifies for a tax break. This change is effective for property put into service in tax years beginning in 2018 and beyond. Examples of such property include:
· Kitchen appliances,
· Lawnmowers, and
· Other equipment used in the living quarters of a lodging facility or in connection with a lodging facility, such as a hotel, motel, apartment house, rental condo or rental single-family home.
Qualifying real property. Sec. 179 expensing can be claimed for qualifying real property expenditures, up to the maximum annual allowance. For tax years beginning in 2018, the Sec. 179 allowance is $1 million. Sec. 179 deductions claimed for real property reduce the maximum annual allowance dollar for dollar since there is no separate limit for qualifying real property expenditures.
Qualifying real property is any improvement to an interior portion of a nonresidential building that is placed in service after the date the building is first placed in service. However, costs attributable to the enlargement of a building, any elevator or escalator, or the building’s internal structural framework do not qualify.
For tax years beginning in 2018 and beyond, the TCJA has expanded the definition of real property eligible for Sec. 179 expensing to include qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property. These elements must be placed in service in tax years beginning after 2017, and after the nonresidential building has been placed in service.
Important note: There are limitations applied to Sec. 179 expensing deductions, especially if your business is conducted as a so-called “pass-through entity” (including a partnership, S corporation or a limited liability company (LLC) that’s treated as a partnership for tax purposes).
4. Time Business Income and Deductions from Pass-Through Entities
Income and deductions from pass-through entities are allocated to the owners based on their ownership percentage in the business. Your pro rata share of a pass-through entity’s net income is taxed at your personal rates.
Under the TCJA, individual federal income tax rate brackets will basically be the same for 2018 and 2019, with modest adjustments for inflation. The traditional strategy of deferring income into next year while accelerating deductible expenditures into this year continues to make sense if you expect to be in the same or lower tax bracket next year. Deferring income and accelerating deductions will at least, postpone part of your tax bill from 2018 until 2019.
Of course, if you expect to be in a higher tax bracket in 2019, take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2019. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate.
5. Maximize the New Deduction for Income from a Pass-Through Entity
A new deduction was created by the TCJA based on qualified business income (QBI) from pass-through entities. For tax years starting in 2018 through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income.
The QBI deduction is available only to noncorporate taxpayers, meaning individuals, trusts and estates. It also can be claimed for up to 20% of income from qualified real estate investment trust (REIT) dividends and 20% of qualified income from publicly traded partnerships (PTPs).
Tax planning can help increase your allowable QBI deduction because of various limitations on the QBI deduction. Before year end, for example, you might be able to increase W-2 wages or purchase additional business assets to help boost your QBI deduction.
Note that moves designed to reduce this year’s taxable income (such as postponing revenue or accelerating expenses) can also inadvertently reduce your QBI deduction. Work with your tax pro to anticipate any side effects of other tax planning strategies and optimize your results on this year’s return.
6. Establish a Tax-Favored Retirement Plan
If your business doesn’t already have a retirement plan, now might be the time to set one up. Current retirement plan rules allow for significant deductible contributions.
For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $55,000 for 2018. If you’re employed by your own corporation, you can contribute up to 25% of your salary to your account, again with a maximum contribution of $55,000.
Other small business retirement plan options include defined benefit pension plans, SIMPLE-IRAs, and 401(k) plans. You can even set up a solo 401(k) plan for just one person. These other types of plans may allow bigger deductible contributions depending on your circumstances.
Important note: If your business has employees, your plan may have to cover them, too.
The deadline to set up a SEP-IRA for a sole proprietorship business and making the initial deductible contribution for the 2018 tax year is October 15, 2019, if you extend your 2018 return to that date. Other plans must generally be established by December 31, 2018, if you want to make a deductible contribution for the 2018 tax year. The deadline for the contribution itself is the extended due date for your 2018 return.
There is one exception: to make a SIMPLE-IRA contribution for 2018, you must have set up the plan by October 1, 2018. So, you will have to wait until next year if you prefer the SIMPLE-IRA option.
7. Sell Qualified Small Business Stock
A 100% federal gain exclusion break may be available if you sell qualified small business corporation (QSBC) stock that was acquired after September 27, 2010. That equates to a 0% federal income tax rate if the shares are sold for a gain.
However, you must hold the shares for more than five years to benefit from this break. Be aware that it’s not available to QSBC stock that’s owned by a C corporation. Plus, many companies won’t meet the definition of a QSBC in the first place. Filler & Associates can help explain the details.
On the one hand, year-end tax planning for small businesses is easier for 2018 than for some previous years. That’s because we know the federal income tax rates that will apply next year.
On the other hand, this year’s tax planning is complicated by all the tax law changes that take effect for tax years starting in 2018. Work with us to identify the best year-end strategies for your specific business situation.