Businesses Need Year-End Tax Planning to Reduce Tax Liability

If it seems like the tax laws are constantly changing, they are. The Tax Cuts and Jobs Act (TCJA) took effect last year, but the IRS is still providing much-needed guidance. And we can expect additional clarifications in the future as taxpayers and tax preparers try to make sense of every aspect of this monumental tax reform. All of this change means that businesses must proactively monitor the impact of these changes to find ways to legally reduce their tax liability.

Have you set aside time to review your tax position? The last four to eight weeks of the year is the perfect time to do so. It’s late enough for you to know how the year may pan out, but not too late that you still can’t pivot to take advantage of these changes. If you are self-employed, own a small business or farm, or have experienced a significant change in income or filing status, this is especially important. It’s also important for flow-through entities since there are many additional reporting requirements you will need to comply with this year.

Don’t Miss Out on These Tax Savings Opportunities

Consider the many opportunities that might be lost if year-end tax planning is not utilized. This includes general strategies, like delaying income recognition and accelerating deductions. The following are other areas to review:

  • Qualified business income deduction. You may continue to deduct up to 20% of your qualified business income (QBI), which is income earned by sole proprietorships, relationships, trusts, and S corporations and LLCs taxed as pass-through entities, that is reported on an individual tax return. The deduction starts to phase out if taxable income exceeds $160,700 or $321,400 if married filing jointly and completely phases out at $210,700 and $421,400, respectively. QBI does not include wages paid to an owner, guaranteed payments to a principal, or certain investments.
  • NOL carryforward period. If your business suffered net operating losses (NOL) in 2018 and beyond, the loss may generally be carried forward against taxable income indefinitely. However, the carryforward amount can only be used to offset 80% of income in future years. NOL carrybacks are not allowed with exceptions for farming, which can be carried back two years.
  • Excess business loss limitation. There is a limit through 2025 that applies to losses from noncorporate taxpayers. These losses can’t be used to offset more than $255,000 ($510,000 for a married couple) of income from other sources. The disallowed portion is not lost and may be carried forward as part of the taxpayer’s net operating loss.

Business tax deductions that will lower your taxable income include:

  • Depreciation and expensing. There is a 100% bonus depreciation for property placed in service before 2023. This allowance generally decreases by 20% per year beginning after 2022 and expires on January 1, 2027. Additionally, the limitation on expensing certain depreciable assets (Section 179) has been increased to $1,020,000 with a $2.55 million investment limitation. Depreciation limits on luxury vehicles also increased.
  • Bad debts. If you use the accrual method of accounting, you can accelerate deductions into 2019 by analyzing your business accounts receivable and writing off those receivables that are totally or partially worthless. By identifying specific bad debts, you should be entitled to a deduction. For non-business bad debts (such as uncollectable loans), the debts must be wholly worthless to be deductible and will probably only be deductible as a capital loss.
  • Self-employed health insurance premiums. Self-employed individuals can claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses, and their dependents as an above-the-line deduction, without regard to the general 10%-of-AGI (adjusted gross income) floor. This includes eligible long-term health care premiums, too.
  • Home office deduction. Expenses attributable to using the home office as a business office are deductible if the home office is used regularly and exclusively: (1) as a taxpayer’s principal place of business for any trade or business, (2) as a place where patients, clients, or customers regularly meet or deal with the taxpayer in the normal course of business, or (3) in the case of a separate structure not attached to the residence, in connection with a trade or business. Taxpayers can decide on documentation for actual expenses or using the IRS safe harbor option.
  • Inventories of subnormal goods. Businesses should routinely check for subnormal goods in inventory. These are goods that are unsalable at normal prices or unusable in the normal way due to damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including second-hand goods taken in exchange. If your business has subnormal inventory at the end of the year, you can take a deduction for any write-downs associated with that inventory provided you offer it for sale within 30 days of your inventory date. The inventory does not have to be sold within the 30-day timeframe.
  • Employee fringes.  Employees can no longer claim miscellaneous itemized deductions for expenses they incur out-of-pocket as an employee.  Moving expense reimbursements are generally no longer excluded from income. Business entertainment is no longer deductible, and meals are deductible at 50%. Employers should review their internal policies to determine if they need to be changed to reflect these changes.

Tax credits reduce tax liability on a dollar for dollar basis and qualifications should be reviewed annually. Highlights include:

  • Small employer pension plan startup cost credit. The maximum credit is $500 per year and is limited to 50% of the start-up costs.
  • Family leave credit. The credit ranges from 12.5% to as much as 25% of qualified leave wages paid.
  • Work opportunity credit. The maximum credit is $2,400 per hire for qualified targeted groups.
  • Small-business health care credit. This credit is allowed if the employer pays at least 50% of premiums and is available for employers with 25 full-time equivalent employees.

This is Not the Year for Status Quo

Business owners tend to rely on what they did last year. That is not a good strategy when it comes to taxes. All the changes in recent years coupled with uncertainty around areas where the IRS has not released guidance make year-end tax planning a must.

The best way for you to manage your overall tax liability is to plan for it, leaving you with more money today to invest in what matters to you. Contact your tax advisor today to request a tax planning meeting.