By Joe Abesamis
2018 brought a host of new changes to the tax code. For example, corporate tax rates were reduced from 35% to 21% and the Corporate Alternative Minimum Tax (AMT) was eliminated. For Individuals, a new 20% deduction for most pass-through income was enacted, the standard deduction was essentially “doubled” and individual tax rates were lowered from 39.6% to 37%. The IRS has been releasing guidance for key components of tax reform at a rapid pace, and it is important that you start to plan for 2018’s taxes while 2018 is still here. Therefore, I am giving my “Top 5 Tax Tips for 2018 Year-End Tax Planning.” This article primarily is focused to help small business owners understand the importance of working with a qualified tax professional with their tax plan.
1.) Defer Income – Income is taxed in the year in when cash is actually/constructively received (“Cash Basis”) or when you earn it (“Accrual Basis”). Deferring income means postponing or delaying the receipt of revenue until a future year. Deferring revenue functions to decrease the amount of income that’s taxed in the current year and essentially pushes the income into the next tax year.
2.) Accelerate Deductions – Similar to “deferring income,” if your business needs equipment or supplies, consider paying for them in December this year (2018) rather than January of next year (2019). Some examples of accelerating deductions are paying bonuses to employees this year, consider making 4th quarter payroll taxes before year end or stocking up of office supplies.
3.) Take Advantage of 100% Bonus Depreciation deduction – One major change is the increase of “bonus” depreciation allowance from 50% to 100% on new and used equipment acquired and placed in service in 2018. This means you are able to expense 100% what the IRS determines to be “qualified property” in the year you place the asset in service.
4.) 20% Qualified Business Income (QBI) deduction – For tax years starting in 2018-2025, tax reform created a new deduction for owners of pass-through business entities, such as sole proprietorships, partnerships, S corporations. The deduction of qualified business income (QBI) subject to limitations that can begin to apply if taxable income exceeds the applicable threshold – 157,500 or if married filing jointly, 315,000. In general, the limits fully apply when taxable income exceeds $207,500 and $415,000 respectively. QBI deduction reduces taxable income, but it doesn’t reduce adjusted gross income. There are many different factors that would either allow or disallow this deduction but they are beyond the scope of this article. There are certain ways to utilize the above strategies to maximize the QBI deduction as well, however that requires close planning with your tax professional.
5.) Get a Tax Plan done – Year-end tax planning is important to provide you peace of mind to see how your individual tax situation stacks up against the new tax law. As these changes are not simple, we suggest a separate appointment to go over the changes that apply to your situation and to talk about how to maximize your tax benefit.
Joe Abesamis, CPA is a tax manager for LSL CPAs and Advisors in Brea, CA. His expertise includes planning for high-net worth clients as well as small to medium sized closely held businesses. For more information, Joe can be reached at 714.651.9000 or email@example.com.