4 Year-End Tax Strategies for Small Businesses
November is a great time to take stock of your company’s year-end tax situation. You still have time to make some adjustments to minimize taxes.
The Tax Cuts and Jobs Act (TCJA) included several changes to tax laws affecting small business. We describe below four strategies you can consider to reduce your 2018 taxes.
1. Purchase new or used assets
Under the TCJA, you can take first-year bonus depreciation of 100% for qualified new and used assets. The inclusion of used property is a new addition under the TCJA. With this bonus depreciation, you can write-off (deduct from taxable income) the entire cost of asset acquisition. This depreciation rule applies to qualified assets.
The TCJA also greatly increases maximum Section 179 deduction to $1 million for assets placed in service in 2018. Note: The IRS does place some limits on using the Section 179 deduction, especially for businesses operating as a partnership, LLC or S Corp.
You can read about the bonus depreciation and section 179 at this link.
2. Purchase a heavy-duty vehicle
If you use heavy SUV’s, pickups or vans for your business, now could be a great time to buy a new one. For tax purposes, the IRS classifies these vehicles as transportation equipment. With bonus depreciation and/or Section 179, you may be able to deduct in a single year all or most of the cost of the vehicle.
You must use the vehicle more than 50% for business. The IRS also limits some allowable vehicle deductions if owners can use the vehicle for personal and business purposes.
To qualify for the 100% bonus depreciation, the vehicle must have a manufacturer’s gross vehicle weight rating of more than 6000 pounds. You can get more info on this tax strategy and a list of qualifying vehicles at this link.
3. Time income or expenses to minimize taxes
To make your best tax decision this year, you should project your income for next year. The IRS will leave the tax brackets virtually the same in 2019 as those of 2018. The agency will bump rates just slightly to cover inflation.
If you expect your income will be the same in 2019 as 2018, the traditional approach of deferring income and accelerating expenses makes sense. You can get info on how to do that in our prior post on year-end tax planning.
Alternatively, if you expect to make more next year and move to a higher tax bracket, consider the opposite approach. If possible, increase this year’s income and/or postpone deductible expenses until 2019. By taking this alternative strategy, you get a lower tax rate on your income this year or you increase next year’s expenses.
The TCJA also offered pass-through businesses some special tax savings with the new qualified business income (QBI) deduction. You can read more about QBI at this post. If this tax strategy is available to you, deferring or accelerating income can affect your QBI.
It’s a complicated situation. Please contact us if you need help in determining your QBI eligibility and related tax strategies.
4. Max out your retirement contribution
Owners of just about any type of business, including sole proprietors, partnerships, LLCs, S and C corporations can set-up a SEP-IRA. These plans are one of the best retirement plans available for self-employed business owners. They operate like an IRA with the added bonus of higher levels of tax-deductible contributions.
You can contribute as much as 25% of your salary to a tax-deferred SEP. You can contribute up to the time you file your company’s tax return, even if you file an extension. For more info, on creating SEP accounts visit this blog post.
If you want to discuss how any of the above strategies could apply to you, please contact us.