Six Small Business Year-End Tax Planning Moves
1. Claim 100% Bonus Depreciation for Asset Purchases
100% first-year bonus depreciation is available for qualified new and now also, thanks to tax reform, used property that is acquired and placed in service in the calendar year 2018. That means your business might be able to write off the total cost of some or all of your 2018 asset additions.
Bonus depreciation is not subject to any spending limits or income-based phaseout thresholds. Consider buying some extra equipment, furniture, computers or other fixed assets before year-end, but make sure they qualify before you do.
2. Claim 100% Bonus Depreciation for a "Heavy" Vehicle
Heavy SUVs, pickups, and vans that are used over 50% for business are treated for tax purposes as transportation equipment, which qualifies them for 100% bonus depreciation.
Specifically, bonus depreciation is available when the SUV, pickup or van has a manufacturer's gross vehicle weight rating (GVWR) above 6,000 pounds. You can verify a vehicle's GVWR by looking at the manufacturer's label, which is usually found on the inside edge of the driver's side door.
If your business needs a vehicle that meets these requirements and you place it in service before the end of this tax year, it could deliver a big write-off.
3. Take Advantage of More Generous Section 179 Deduction Rules
For qualifying property placed in service in tax years beginning in 2018, tax reform increased the maximum Section 179 expensing amount to $1 million.
Other positive changes to the Section 179 expensing rules include:
Property used for lodging. The new law repealed prior-law that excluded from Section 179 the expensing of personal property used to furnish lodging so that such property now qualifies if placed in service in tax years beginning in 2018 and after.
Examples include furniture, appliances, lawnmowers, and other equipment used in the living quarters of a lodging facility or in connection with a lodging facility, such as a hotel, motel, apartment house, rental condo or rental single-family home.
Qualifying real property. Section 179 expensing can be claimed for qualifying real property expenditures, up to the maximum annual allowance.
Qualifying real property refers to any improvement to an interior portion of a nonresidential building that is placed in service AFTER the date the building is first placed in service. However, costs attributable to the enlargement of a building, any elevator or escalator, or the building's internal structural framework do not qualify.
For tax years beginning in 2018 and beyond, the law expanded the definition of real property eligible for Section 179 expensing to include qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property.
Important note: Various limitations apply to Section 179 expensing deductions, especially if you conduct your business as a so-called "pass-through entity" (including a partnership, S corporation or a limited liability company that's treated as a partnership for tax purposes).
4. Time Business Income and Deductions
Because individual income tax rate brackets will basically be the same for 2018 and 2019, the traditional strategy of deferring income into next year while accelerating deductions into this year (including income and deductions from pass-through entities) makes sense if you expect to be in the same or lower tax bracket next year.
However, if you expect to be in a higher tax bracket in 2019, you should do just the opposite so that more income will be taxed at this year's lower rate instead of next year's higher rate.
5. Maximize the New Deduction for Income from a Pass-Through Entity
A new deduction was created based on qualified business income (QBI) from pass-through entities. 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.
The QBI deduction is available only to non-corporate taxpayers, meaning individuals, trusts and estates. It also can be claimed for up to 20% of income from qualified real estate investment trust dividends and 20% of qualified income from publicly traded partnerships.
Because of various limitations on the QBI deduction, tax planning can help increase your allowable QBI deduction. For example, before year end, you might be able to increase W-2 wages or purchase additional business assets to help boost your QBI deduction.
Also, be aware that the moves designed to reduce this year's taxable income discussed earlier can inadvertently reduce your QBI deduction. This deduction is complex, so consulting a tax pro is a wise move.
6. Establish a Tax-Favored Retirement Plan
If your business does not already have a retirement plan, it might be time to change that. Current retirement plan rules allow for significant deductible contributions.
For example, if you're 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're employed by your own corporation, you can contribute up to 25% of your salary to your account, with a maximum contribution of $55,000.
Other small business retirement plan options include defined benefit pension plans, SIMPLE-IRAs, and 401(k) plans. You can even set up a solo 401(k) plan for just one person. Depending on your circumstances, these other types of plans may allow bigger deductible contributions.
Important note: If your business has employees, your plan may have to cover them, too. Also, there are differing deadlines for setting up a plan depending on the type, some of which occur prior to year-end.
Tax planning is complex. A tax pro can help identify the best year-end strategies for your specific business situation and save you big!