The Tax Cuts and Jobs Act (TCJA) is now law, with most provisions in full effect for tax year 2018. Taking these new laws into consideration, there are many positions that can be leveraged before year-end to maximize tax savings. For both business owners and shareholders/partners in pass-through entities, the planning prospects are rife with opportunity.
Tax Due Dates
It is encouraged that businesses close their books as soon as possible after 12/31/18. This will enable the business to provide financial information to their L&B Professional in a timely manner, keeping the following due dates in mind:
- Due March 15, 2019
- Partnerships – filing calendar year Form 1065
- S-Corporations – filing calendar year Form 1120S
- Due April 15, 2019
- C-Corporations – filing calendar year Form 1120
Income and Deduction Timing
Deferring income to the next taxable year is a time-honored year-end planning tool. If it is expected that the business’ taxable income will be higher in 2018 than in 2019 (or if it is expected that the pass-through owner’s tax bracket will be higher in 2018), there may be a benefit to deferring income into 2019. In the same way, deductions can be accelerated into 2018 by paying out bonuses or purchasing additional assets before the end of the year, both of which are discussed below.
On the other hand, the business may benefit from accelerating income into 2018 if a higher tax bracket is anticipated in 2019 or if additional income is needed in 2018 to take advantage of an offsetting deduction or credit. This can be accomplished by accelerating billing and deferring payment of expenses until next year, assuming the cash basis of accounting is used.
Section 179 allows full expensing of new and used equipment, software purchased “off-the-shelf,” and specific qualified improvement property for commercial buildings. The Tax Cuts and Jobs Act of 2017 (TCJA) significantly increases the available expense to $1 million with a phaseout for purchases in excess of $2.5 million, making this deduction available to more businesses.
Bonus depreciation is another valuable tax-saving tool for businesses as it allows for the immediate expensing of new and used equipment, including depreciable computer software and water utility property, with no phaseout restrictions. For property acquired and placed in service during the period beginning on September 27, 2017 and running through 2022, the bonus depreciation percentage is 100%, with a phase down beginning in 2023. This means it could be advantageous to purchase fixed assets before year-end to generate additional tax savings. Note that certain items of real property, as with Section 179, will not be eligible for this provision.
Pass-Through Income Deduction
The TCJA provides a maximum 20% deduction for qualified business income from pass-through entities (partnership, S corporation, or sole proprietorship). This was in attempt by Congress to level the tax rate field for pass-through business due to the reduced tax rate at the C corporation level. It is important to keep in mind that for taxpayers above a certain limit this 20% deduction may be limited to greater of: 50% of the W-2 wages paid by the business or 25% of the W-2 wages paid by the business plus 2.5% of the unadjusted basis of depreciable property owned by the business. From a planning standpoint, increasing wages, specifically through the use of year-end bonuses, could increase the allowable passthrough deduction and reduce the tax liability at the pass-through owner level. This may also a good strategy for an S-Corporation owner, in that bonuses can be paid to the owners in a reasonable fashion to potentially maximize this deduction. However, this should be assessed on a per taxpayer basis in order to assess the benefits. Please see our article on the pass-through income deduction for more information.
Deduction for Net Interest Expense
In 2017, there were minimal limitations on the interest expense deductible for a business. For 2018 and on, however, the TCJA further limits the allowable deduction to 30% of adjusted taxable income (any disallowed amounts are carried forward indefinitely). Small businesses with average gross receipts of $25 million or less for the three preceding years are not subject to this limitation. Each company should assess its expected taxable income to determine if this limit may restrict the deduction for interest paid. If so, those businesses are encouraged to pay down high interest-bearing debt to ensure that all business interest is deductible.
Meals and Entertainment Expenses
Prior law allowed a 50% deduction for most meals and entertainment expenses. While the meals deduction remains, the Tax Cuts and Jobs Act eliminated the deduction for entertainment expenses, creating three different categories of meals and entertainment expenses. The first is entertainment, which is not deductible, an example of which would be a sporting event or theater tickets. The second class is 50% deductible, which entails expenses such as meals with clients. Finally, 100% deductible expenses encompass company meals, i.e. holiday, birthday, and anniversary parties. From a planning perspective, businesses would be wise to review their books in 2018 to ensure that meals and entertainment expenses are separately recorded in these three categories in order to accurately track deductible expenses.
The significant changes in 2018 that came with the passing of the Tax Cuts and Jobs Act are further explored in our article on the tax act. If you need further assistance in year-end planning and analyzing how it will impact your business, please contact your L&B Professional at (858) 558-9200.