Tax strategies for small business owners for year-end 2019
As we close out the calendar year, it’s a good time to review your business’s tax situation.
This is a great month to estimate your tax bill for the year and to get a head start on your 2019 tax preparation. By reviewing your business income/expenses for the year, you can maximize your tax savings prior to December 31.
Many of our small business clients operate as pass-through entities* (such as an LLC, partnership, S corporation or sole proprietorship).
Below, we provide a few end-of-year tax strategy tips for pass-through entities. Before you implement any of these tips, make sure to check with your accounting and financial advisors to review your specific situation.
Time Income and Expenses
If you operate a pass-through entity, your business income and deductions pass through to your personal tax rates. Tax rates next year should be very similar to this year’s tax rates. Review your income and expenses for 2019 and estimate those for 2020.
If you expect to be in the same or lower tax bracket next year, you can defer income into 2020 and accelerate deductible expenses into this year. This approach allows you to postpone part of your tax liability to next year.
In contrast, if you expect to reach a higher tax bracket next year, consider the opposite approach. You could accelerate income and delay your expenses. With this approach, you get more of your income taxed at a lower rate in 2019 instead of next year’s higher rate.
Take Full Advantage of QBI
The 2017 Tax Cuts and Jobs Act (TCJA), allows a significant tax deduction on qualified business income (QBI) for some pass-through entities. In a past blog post, we provided an overview of QBI.
If you qualify for QBI, you can receive a 20% deduction on your pass-through entity’s taxable income. This 20% deduction can reduce your effective marginal tax rate to 29.6%.
If you qualify for a QBI deduction and your taxable income is higher than the allowable amount, you could reduce the income in several ways. You can defer income, accelerate expenses, or contribute to a retirement account.
Establish Tax-favored Retirement Plans
If you have not set-up a retirement account, now is a great time to do so. If you have established an account, December is a good time to contribute to your retirement.
If you are self-employed, you can set up a SEP-IRA and contribute up to 20% of your self-employed income (up to a max contribution of $56,000.) If you own an S corporation, you can contribute up 25% of your salary up to the same maximum of $56,000.
Of note: you have up to Sept 15, 2020, to make your SEP-IRA contribution.
In addition to SEP-IRAs, small business owners can take advantage of other retirement options 401(k) plans, SIMPLE-IRAs, or even defined benefit plans. Talk to your tax and financial advisors to determine what’s best for you.
Invest in Depreciable Property
In 2019, the tax regulations allow you to depreciate 100% of qualified new and used property that you acquire and place in service before Dec 31, 2019. If you purchase qualified property in December, you can write it off for the entire year.
Of note for procrastinators, Microsoft will discontinue support for Windows 7 in January 2020. If you still have older computers in your office, this would be a good month to upgrade. You can read more about the property eligible for bonus deprecation at this link.
Do you need a heavy-duty vehicle (one weighing more than 6,000 lbs), which you would drive more than 50% for business? If yes, and you can purchase that vehicle in December, and take advantage of the bonus depreciation
Maximize Section 179 Expensing
The IRS allows a business to deduct the purchase of certain real property as an expense in the year it purchases the property. To qualify for a 179-expense deduction, the property must be:
- Purchased (not leased)
- Acquired from a non-related party, and
- Used more than 50% of the time by the business
Under the TCJA, the IRS regulations increased the limit on a 179-property expense to $1,020,000. You can read more about the IRS regulations on 179 expenses at this link*.
Of note: If you are eligible for the 20% QBI deduction, and you use a high 179-expense deduction, you could reduce your allowable QBI deduction.
If you have any questions, on how to best approach your year-end tax planning, please contact us. One of our tax professionals will be happy to review your business tax return from last year and help you develop estimated taxes for 2019.