Tax Planning Time for Small Business Owners

11/06/2018|John R. Dundon II, EA|Tax Guidance & Preparation, Tax planning

Greetings fellow business owners and tax nerds alike! Tax planning time for small business owners is upon us.

As we run full tilt into the holidays – between storing boats & fishing poles, repairing bikes, readying hunting gear and waxing skis don’t forget to THINK about next spring’s tax time.

An ounce of preparation today can save BIG $$ come spring.

TIME to talk taxes!

Particularly if you are looking to lower your tax bill for this year and possibly the next

… and who isn’t interested in that?!?

This year tax planning takes place in the light of a new – Tax Cuts and Jobs Act (TCJA) – a generational change in how the United States taxes income. In fact:

the last time the US Tax Code changed this much was in 1986 under President Reagan
tax practitioners are retiring in droves – thoroughly defeated with the sheer volume of changes
the US Treasury is still behind in producing regulations to govern these new statutes
the 2018 filing season may very well be delayed as a result

The best advice I am offering business owners is…

to consider changing accounting method to cash if possible.

to really drill down on your tax practitioner to make sure they know their salt.

to buy that new tool or machine now BEFORE THE END OF THE YEAR!

Individuals can look forward to among other things:

lower income tax rates
a substantially increased standard deduction
severely limited itemized deductions
no personal exemptions
an increased child tax credit
a watered-down alternative minimum tax (AMT)

This post however is intended for small businesses owners. If this is you, look forward to among other things:

corporate tax rate cut to 21%
corporate AMT is gone
new limits on business interest deductions
liberalized expense and depreciation rules.
new deduction for non-corporate taxpayers with qualified business income from pass-through entities.

Here’s how tax reform changed accounting methods for small businesses.

To qualify as a “small business” you must, among other things, satisfy a gross receipts test. Effective immediately the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts do not exceed $25 million. The law also:

Exempts small business taxpayers from certain accounting rules for:
- inventories
- cost capitalization
- long-term contracts.
Allows more small business taxpayers to use the cash method of accounting.

This expanded gross receipts test loosens another barrier for using Cash method of accounting for income tax purposes.

Accounting method changes can be complicated and nuanced. Do not be intimidated. It is accomplished by filing IRS Form 3115.

Why is this important?

Income shifting between tax periods is the answer. It is generally speaking a lot easier to shift income when accounting for your income using the cash method of accounting.

Some of the most common strategies include holding off billings till next year and accelerating expenses into this current year by paying bills early.

Revenue Procedure 2018-40 provides the procedures that a small business taxpayer may use to obtain automatic consent to change its methods of accounting to reflect these statutory changes.

Aside from considering the cash method of accounting these are my other top general recommendations for small business owners.

You may be entitled to a deduction of up to 20% of their qualified business income.
- For 2018, if your 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 you are in a Specified Service Trade or Business (SSTB)by the following:
  - 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.
You may be able to achieve significant savings by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2018.
- Depending on your business model, you may be able increase the new deduction by increasing W-2 wages before year-end.
- The rules are quite complex, so don’t make a move in this area without contacting me.
Now is the time to consider buying assets that qualify for the liberalized business property expense option.
- The expense limit is $1,000,000, and the investment ceiling limit is $2,500,000 under Code Section 179.
- The expense is generally available for most depreciable property (other than buildings), and off-the-shelf computer software.
- The expense also is available for qualified improvement property (generally, any interior improvement to a building’s interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.
- The $$ ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment.
- The expense deduction is NOT prorated for the time that the asset is in service during the year.
- The expense 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.
- Property acquired and placed in service in the last days of 2018, rather than at the beginning of 2019, can result in a full expense deduction for 2018.
Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment-bought used (with some exceptions) or new-if purchased and placed in service this year.
- The 100% write off is permitted without any proration based on the length of time that an asset is in service during the tax year.
- As a result, the 100% bonus first-year write off is available even if qualifying assets are in service for only a few days in 2018.
Businesses may be able to take advantage of the de minimis safe harbor election (aka the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules.
- To qualify for the election, the cost of a unit of property can’t exceed $5,000 if you have an applicable financial statement
  - AFS – e.g., a certified audited financial statement along with an independent CPA’s report
- If there’s no AFS, the cost of a unit of property can’t exceed $2,500.
- Where the UNICAP rules aren’t an issue, consider purchasing such qualifying items before the end of 2018.
A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2018 (and substantial net income in 2019) may find it worthwhile to accelerate just enough of its 2019 income (or to defer just enough of its 2018 deductions) to create a small amount of net income for 2018.
- This will permit the corporation to base its 2019 estimated tax installments on the relatively small amount of income shown on its 2018 return, rather than having to pay estimated taxes based on 100% of its much larger 2019 taxable income.
To further reduce 2018 taxable income, consider:
- deferring a debt-cancellation event until 2019.
- disposing of a passive activity in 2018 if doing so will allow you to deduct suspended passive activity losses.

These are just some of the year-end steps that can be taken to save taxes. The IRS put together a reasonably comprehensiveTax Cuts and Jobs Act: A comparison for businessespage up on its siteidentifying new distinctions regarding: