Do you own a small business? If so, there is still time to significantly reduce your 2018 corporate income tax bill. Here are seven year-end options that take into account changes included in the Tax Cuts and Jobs Act (TCJA).
1. Claim 100% bonus depreciation for asset additions
Thanks to the TCJA, 100% first-year bonus depreciation is available for qualified new and used property that is acquired and placed in service in calendar year 2018. That means your business might be able to write off the entire cost of some or all of your 2018 asset additions on this year’s return. You may wish to consider making additional acquisitions between now and year-end. Contact your tax pro for details on the 100% bonus depreciation break and what types of assets qualify.
2. Claim 100% bonus depreciation for heavy SUV, pickup or van purchased and placed in service in 2018
The 100% bonus depreciation provision can have a hugely beneficial impact on first-year depreciation deductions for new and used heavy vehicles used over 50% for business. That’s because heavy SUVs, pickups, and vans are treated for tax purposes as transportation equipment, and that means they qualify for 100% bonus depreciation.
3. Take advantage of more generous Section 179 deduction rules
For qualifying property placed in service in tax years beginning in 2018, the TCJA increased the maximum Section 179 deduction to a whopping $1 million (up from $510,000 for tax years beginning in 2017). This may include property used for lodging, qualifying real property, qualified expenditures such as roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property. Consult your HW & Associates tax professional to learn about eligibility requirements and limitations, especially if you conduct your business as a partnership.
4. Time business income and deductions for tax savings
If you conduct your business using a pass-through entity – meaning a sole proprietorship, S corporation, LLC, or partnership – your shares of the business’s income and deductions are passed through to you and taxed at your personal rates. Next year’s individual federal income tax rate brackets will be the same as this year’s, with modest bumps for inflation. So the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2018 until 2019.
If, however, you expect to be in a higher tax bracket in 2019, take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2019. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate.
6. Maximize the new deduction for pass-through business income
The new deduction based on qualified business income (QBI) from pass-through entities was a key element of the TCJA. For tax years beginning in 2018-2025, the deduction can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income.
Because of various limitations on the QBI deduction, tax planning moves (or non-moves) can unexpectedly increase or decrease your allowable QBI deduction. For example, moves that reduce this year’s taxable income can have the negative side effect of reducing your QBI deduction. So if you are one who can benefit from the deduction, make sure to consult with your HW & Associates accountant to optimize your results on this year’s return
7. Establish a tax-favored retirement plan
If your business doesn’t already have a retirement plan, now might be the time to establish one. Current retirement plan rules allow for significant deductible contributions. For example if you are self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $55,000 for 2018. If you are employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $55,000.
Please call our office or email your HW & Associates tax professional to review these options and see if any of them may be applicable to your business.