Year-End Tax Planning for Businesses
There are a number of end of year tax planning strategies that businesses can use to reduce their tax burden for 2018. Here are a few of them:
Businesses using the cash method of accounting can defer income into 2019, by delaying end-of-year invoices, so payment is not received until 2019. Businesses using the accrual method can defer income by postponing delivery of goods or services until January 2019.
Property, Plant and Equipment Acquisitions and Maintenance
Section 179 Expensing. Business should take advantage of Section 179 expensing this year for a couple of reasons. First, in 2018 businesses can elect to expense (deduct immediately) the entire cost of most new equipment up to a maximum of $1 million for the first $2.5 million of property placed in service by December 31, 2018. Keep in mind that the Section 179 deduction cannot exceed net taxable business income. The deduction phases out dollar for dollar, if equipment acquisitions exceed the $2.5 million threshold and is eliminated entirely, if they exceed $3.5 million.
Effective in 2018, tax reform legislation known as the Tax Cuts and Jobs Act (TCJA) expanded the definition of Section 179 property to allow the taxpayer to elect to include certain improvements made to nonresidential real property that is already in service. The following types of property qualify under the new rules:
- Qualified improvement property, which includes improvements to a building’s interior other than the internal structural framework of the building. Elevators, escalators and costs attributable to the enlargement of a building are not qualified improvement property.
- Roofs, HVAC property, fire protection systems, alarm systems and security systems.
Bonus Depreciation. Businesses are allowed to immediately deduct 100% of the cost of qualified property placed in service after September 27, 2017, and before 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.
Qualified Property. Qualified property is property placed in service and used predominantly (more than 50%) in a trade or business. Most machinery, equipment, computers, appliances, furniture and depreciable computer software purchased new is qualified property. Used property is generally qualified property, if the taxpayer has not previously used it, and it was not acquired from a related party. The TCJA removed qualified improvement property placed in service after 2017, from the definition of qualified property.
Note: Many states have not adopted enhanced Section 179 expensing or bonus depreciation rules and, therefore, may not allow for the maximum federal deduction. Often, two sets of depreciation records are needed to track the federal and state tax differences.
Please contact our office, if you have any questions regarding Section 179 expensing or bonus depreciation.
Repair Regulations. Where possible, end of year repairs and expenses should be deducted immediately, rather than capitalized and depreciated. Small businesses lacking applicable financial statements (AFS) are able to take advantage of de minimis safe harbor by electing to deduct smaller purchases ($2,500 or less per purchase or per invoice). Businesses with AFS (generally, audited financial statements) may regard amounts up to $5,000 as de minimis in accordance with their accounting procedures used for financial reporting. Small business with gross receipts of $10 million or less may also take advantage of a safe harbor for repairs, maintenance and improvements to eligible buildings. Please call our office, if you would like more information on this topic.
Depreciation Limitations on Luxury, Passenger Automobiles and Heavy Vehicles. The TCJA changed depreciation limits for luxury passenger vehicles placed in service after 2017. For a vehicle or portion of the basis of a vehicle on which bonus depreciation is not claimed, the maximum allowable depreciation deduction is $10,000 for the first year.
For passenger autos eligible for the additional bonus first-year depreciation, the maximum first-year bonus depreciation allowance remains at $8,000. It applies to new and used (“new to you”) vehicles acquired and placed in service after September 27, 2017, and remains in effect for tax years through 2022. When combined with the increased depreciation allowance above, the deduction amounts to as much as $18,000.
Heavy vehicles including pickup trucks, vans and SUVs whose gross vehicle weight rating (GVWR) is more than 6,000 pounds are treated as transportation equipment instead of passenger vehicles. As such, heavy vehicles (new or used) for a 100% first-year bonus depreciation deduction.
Note: Deductions are based on a percentage of business use, i.e. a business owner whose business use of the vehicle is 100% can take a larger deduction than one whose business use of a car is only 75%.
Other Year-End Moves to Consider
Qualified Business Income Deduction. Under the TCJA, business owners may be entitled to a deduction of up to 20% of their qualified business income (QBI) from a qualified trade or business for tax years 2018 through 2025. Owners who operate their businesses as C corporations cannot take the deduction but may benefit from the lower corporate tax rate. The deduction begins to phase out if taxable income exceeds $157,500 ($315,000 for joint returns).
The QBI deduction is complex, and tax planning strategies can directly affect the amount of deduction, i.e., increase or reduce the dollar amount. As such, it is especially important to speak with a tax professional before the end of the year to determine the best way to maximize the deduction.
Small Business Health Care Tax Credit. Small business employers with 25 or fewer full-time equivalent employees with average annual wages of $52,400 may qualify for a tax credit to help pay for employees’ health insurance. The credit can be as much as 50% (35% for not-for-profits) of the health insurance premiums paid by the employer (and not withheld from the employee).
Business Energy Investment Tax Credits. Business energy investment tax credits are still available for eligible systems placed in service on or before 2023. Some types of property will become ineligible for the credits earlier than that. Property eligible for business energy credits include geothermal electric, wind-based and solar energy systems. If you are considering an energy saving energy system for your business, please contact our office to discuss your options and the credits that may be available.
Retirement Plans. Businesses that have not yet done so should consider setting up retirement plans before the end of 2018. Many options are available. Call our office, if you would like to discuss choosing a retirement plan that meets the needs of your business.
Dividend Planning. C corporations should evaluate whether they might be subject to accumulated earnings tax and consider issuing dividends to shareholders before the end of the year to avoid the tax.
Call a Tax Professional First
We’ve addressed are just a few of the year-end planning tax moves that could make a substantial difference in your tax bill for 2018. If you’d like more information, please call to schedule a consultation to discuss your specific tax and financial needs, and let us help you develop a plan that works for your business.