Although the best tax planning for business owners takes place throughout the year, you still have some opportunities to save before the end of the year. Since last year, the Tax Cuts and Jobs Act of 2017 (TCJA) has created some business tax planning challenges, but a number of its provisions can provide extraordinary tax benefits if you use them properly.
Here are some steps you can take to minimize your business taxes at year-end:
Time your income and expenses
By properly timing your business income and expenses, you may be able to lower your business taxes this year. Delaying payments from your customers until January will obviously reduce your 2018 income. If you have the money, you can also lower your 2018 profits by:
- Purchasing equipment that you were planning to buy in the near future,
- Stocking up on office supplies and other items that you utilize on a regular basis, and
- Pre-paying your business mortgage, rent, insurance and/or professional subscriptions.
Remember to spend money only on items that you actually need to operate your business, and not to purchase things just to increase your deductions!
For example, if your business has suffered some losses this year and you expect things to get better in a few months, you may wish to consider deferring as many expenses as you can to next year. The key is to take deductions when your profit is higher, when your tax rates are higher, and/or when the deduction amount is higher.
It is clearly difficult, however, to predict how your business will fare next year – for that reason many tax advisors suggest that their clients first speak to them to review their books and their business plan and discuss whether receipt of income and payment of expenses would benefit them more this year or next.
Expense or depreciate your new equipment
It is usually more beneficial to expense your new or used equipment and get the full deduction immediately rather than depreciate it over many years. It doesn’t matter when you bought the equipment – it must be placed in service before December 31, 2018 for you to receive a deduction for this tax year.
Note that with the changes in the tax law, however, expensing may no longer be your best option. Talk to your tax advisor to see if you can benefit from significant depreciation deductions available this tax year:
- 26 U.S. Code § 179 has been expanded, now permitting businesses to take a first year deduction of up to $1 million on purchases of qualified equipment. Above this amount, the deduction is reduced dollar for dollar until it completely phases out at $2.5 million.
- For equipment expenditures that either don’t qualify under or exceed the limits of Section 179, there is 26 U.S. Code § 168 bonus depreciation. Under the new tax law, bonus depreciation has been increased from 50% to 100% of the adjusted basis of the property, and now also includes used equipment that has not yet been utilized by your company (note that bonus depreciation may not be available in your state).
Buy energy-efficient business property
For additional tax savings, consider purchasing energy-efficient business property and equipment. You can deduct energy-efficient property purchased for commercial buildings, and receive a direct credit for business vehicles, including hybrid cars. See 26 U.S. Code § 48.
Deduct your net operating losses
Under the new tax law, net operating losses (NOLs) are now limited to 80% of your taxable income and can no longer be carried back. If you have losses that were generated before December 31, 2017, you may still be able to eliminate 100% of them – talk to your accountant or tax attorney to see how to best apply this deduction in your circumstances.
Put money into retirement plans
Retirement funding should be part of every business tax plan. If you haven’t already done so, setting up a 401(k) plan for your business could save you more in taxes than the cost of setting it up – there is a tax credit available of up to $500 per year that applies towards the setup and the first three years of administering a company 401(k) plan. You also receive a deduction for all amounts put into the plan, which are tax-deferred until you or your employees withdraw funds.
This tax savings is available to all businesses, including sole proprietorships. Small businesses might wish to consider having their tax advisor help them set up a Safe Harbor 401(k) as part of their small business tax plan. This type of 401(k) is structured in such a way that it automatically passes or avoids the standard non-discrimination test for contributions to the plan.
Issue bonuses for your staff
If you have a corporation, you can lower your business taxes with employee gifts or bonuses at year-end. This also increases goodwill among your staff, particularly during the holidays.
C Corporations can only deduct bonuses given to shareholders with a 50% or greater interest in the company. S Corporations can deduct the full amount. These deductions are not available to LCCs, partnerships and sole proprietors.
Business interest expense deduction
Loan interest is deductible so long as the funds were used to pay business assets or expenses. The business interest expense deduction under amended 26 U.S. Code § 163(j) is currently limited to 30% of adjusted taxable income (AGI) for taxpayers meeting the $25 million gross receipts test.
Maximize your write-offs
In addition to taking your end-of-year business tax deductions, you might all wish to review all business items that can be written off on this year’s tax return such as bad (uncollectible) debts, the full amount of any obsolete or otherwise worthless equipment, and the reduction in value of equipment that is old or damaged but still usable.
Note that if you write off a bad debt, you will have to reverse your write-off and include the amount in your taxable income if you receive the funds at a later time.
Tax consultants for your business planning
The tax lawyers and other tax professionals at Moskowitz, LLP offer comprehensive tax assistance to businesses large and small, including year-end business tax planning services. To talk to a tax attorney or accountant at our Business Tax Group, contact our San Francisco office at (415) 394-7200.