Taxes are something we’re all familiar with in one form or another. By law, any income made as an employee or net income made as a business owner must be reported and taxed. If you’re a small business owner, you understand that tax planning happens year-round, not just in April. The last month of 2018 is here, and many small business owners have already approached us with questions about end-of-year tax planning.
After the Tax Cuts and Jobs Act of 2017 (TCJA) was passed, there were provisions that affected business deductions and personal deductions. For businesses, a couple big changes affect depreciation of assets, the qualified business income deduction, and meals and entertainment expenses. For individuals, changes to itemized deductions available and standard deduction amounts changed drastically. As many small businesses are taxed on a pass-through basis, the business changes may affect personal income tax returns, so we have included some strategies still available to the small business owner that can ultimately affect their personal tax return.
1. Invest in your employees and service.
December is a popular time of year for business owners to purchase assets. Businesses can take advantage of the 100% bonus depreciation, or full write-off of qualifying assets placed in service in 2018, both new and used, with tax lives of 20 years or less. Expensing of asset placed in service under Section 179 is also available for businesses with less than $2.5 million of assets placed in service during 2018. For these small businesses, up to $1 million of assets placed in service in 2018 can be expensed for qualifying purchases.
However, purchasing assets prior to the end of the year simply to lower income taxes with no economic benefit to the company may not be the best choice. An asset purchase could be worthwhile if, for example, it improves operational efficiency, replaces equipment that is old and has high maintenance costs, or will need to be purchased shortly after year end. Make sure there’s a direct benefit to your business prior rushing out to purchase assets prior to year-end solely to reduce your 2018 taxes.
2. Pay your 2018 property taxes or state tax estimates early.
The TCJA changed potential deductibility of state and local taxes (SALT) for personal taxes, however, for businesses, SALT remain deductible as long as they are an ordinary and necessary cost of doing business. Businesses have the flexibility of paying SALT (assessed in 2018) in 2018 (or 2019, if not due until after year-end). In either case, the SALT paid would be deductible. So small businesses should assess current year profitability and determine which time period could benefit from the deduction most. Remember to pay SALT on time as fines, penalties, and interest related to the late payment of SALT are not deductible.
For personal taxes, the TCJA affected the deductibility of SALT significantly, especially for those taxpayers residing in higher tax states. The new law limits the deductibility of SALT on Schedule A, Itemized Deductions, to $10,000 per tax return. If the total of your real property taxes paid, state and local income taxes paid, and for some jurisdictions, personal property taxes paid, is greater than $10,000, the amount greater than $10,000 is not considered deductible.
Further complicating the matter is the increase in the standard deduction for the different filing status, which is $24,000 for married filing jointly, $18,000 for Head of Household and $12,000 for Single and Married Filing Separately. That is an increase from $12,700, $9,350 and $6,350, respectively in 2017. For each taxpayer, the situation will be different and the ultimate decision on when to pay your property taxes may depend on any state or local credit/deduction you may receive.
3. Make charitable contributions.
As mentioned above, the standard deduction has increased significantly for individuals, no matter the filing status making it less likely for individuals to itemize deductions. Therefore, it will be more difficult for individuals to benefit on their Federal tax returns from their charitable giving. The general rules for charitable contributions remain the same with a few exceptions. If you know you will have enough deductions to itemize, then making a charitable contribution prior to year-end will most likely reduce your tax bill. If not, there still may be state tax deductions that may be available. If you are required to take a required minimum distribution (RMD) from your retirement plan, and will not have enough deductions to itemize, it might make sense to have the RMD directly contributed to a qualifying charity from your retirement plan. You would not have a charitable contribution deduction, that would not be deductible on your Federal tax return anyway, and the RMD would not be considered income to you. The treatment on your state income tax return would depend on each states tax code.
In general, if you know that you’ll be able to itemize, charitable giving makes sense for you. However, with the TCJA tax law changes many of taxpayers who itemized their deductions last year will likely choose not to itemize their deduction for 2018.
4. Pay your January 2019 mortgage before the 1st of the year.
If you know you will be itemizing deductions in 2018, you can pay your January 2019 mortgage payment prior to year-end and claim the mortgage interest included on that payment, which will be reported to you on Form 1098. Keep in mind that if you pay your January 2019 mortgage in December, your deduction will be smaller at the end of the following year.
Be sure to ask yourself if there’s any reason your household might earn less money next year before making the 13th payment. Variable annual income is pretty common for a small business owner and unforeseen circumstances such as caring for a family member might cause you to scale back your business or hours. If you anticipate either of these scenarios, it could be in your best interest to push off those savings until next year.
2018 Taxes: The Game Plan
Overall, it’s important to remember that maximizing tax deductions for 2018 is not possible with a cookie-cutter approach. Your neighbor’s tax strategy may not work for your business model, especially now that few business owners will itemize deductions. Whether or not you itemize deductions this year, always check with a tax expert to get the best advice for your personal tax situation.
Looking for a team to complete your 2018 taxes? Contact us today to see if we’re the right fit for you and your business.