2018 Last-Minute Business Tax Strategies
Although there are only a few weeks left to go before the year ends, it is not too late to implement some planning moves that can improve a business’s tax situation for 2018 and beyond.
Plan to maximize the Qualified Business Income Deduction
Make the most of the deduction for qualified business income (QBI). For tax years beginning after 2017, taxpayers other than corporations may be entitled to a Code Sec. 199A deduction of up to 20% of their QBI.
For 2018, if taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers, this deduction may be limited. The limitations phase-in for joint filers with taxable income between $315,000 and $415,000 and for all other taxpayers with taxable income between $157,500 and $207,500, meaning you will begin to lose the benefits of the deduction when you hit these income levels.
Taxpayers may be able to achieve significant savings by deferring income or accelerating deductions to come under the dollar thresholds (or be subject to a smaller phase-out of the deduction) for 2018. Depending on their business model, taxpayers may also be able to increase the new deduction by increasing W-2 wages before year-end.
The rules are complex, and the best year-end strategy in this area will depend on the unique characteristics of your business.
Consider a change in accounting method to the Cash Method
More businesses are eligible for cash method flexibility. More “small businesses” are able to use the cash (as opposed to accrual) method of accounting in 2018. To qualify as a “small business”, a taxpayer must satisfy a gross receipts test. Effective for tax years beginning after Dec. 31, 2017, the gross-receipts test is satisfied if, during a 3-year testing period, average annual gross receipts do not exceed $25 million. This amount used to be only $5 million!
Cash method businesses may be able to defer income by holding off billings until next year, or by accelerating expenses by paying bills or by making certain prepayments.
Invest today, and expense 100% today
Eligible businesses should consider making expenditures that qualify for the liberalized business property expensing options. For tax years beginning in 2018, the Section 179 expensing limit is $1,000,000, and the investment ceiling limit is $2,500,000. Note that Section 179 expensing is limited to the amount of taxable income (as specially computed) from all of the taxpayer’s active trades or businesses.
Expensing is generally available for most depreciable property (other than buildings), and off-the-shelf computer software. For property placed in service in tax years beginning after Dec. 31, 2017, expensing also is available for qualified improvement property (generally, any interior improvement to a building’s interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.
Businesses also can claim a 100% Bonus first-year depreciation deduction for machinery and equipment—bought used (with some exceptions) or new—if purchased and placed in service this year.
The 100% write-off is permitted for both Section 179 and Bonus without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% first-year write-off is available even if qualifying assets are in service for only a few days in 2018.
C Corps should plan to have “some” 2018 taxable income, if 2019 looks to be prosperous
Careful planning may reduce estimated tax. A corporation (other than a “large” corporation) that anticipates no taxable income for 2018 (and substantial net income in 2019) may find it worthwhile to accelerate just enough of its 2019 income (or to defer just enough of its 2018 deductions) to create a small amount of net income for 2018. This will permit the corporation to base its 2019 estimated tax installments on the relatively small amount of income shown on its 2018 return, rather than having to pay estimated taxes based on 100% of its much larger 2019 taxable income.
Generally speaking, a taxpayer will be treated as a “large” corporation only if it had taxable income of $1 million or more in any one of the three immediately preceding tax years. As a result, a corporation that didn’t reach that threshold in 2016 or 2017 but expects net income of $1 million or more in 2018 and later tax years will have an additional incentive for deferring income into (or accelerating deductions from) 2019. If such a shifting of income or deductions lets the corporation avoid reaching the $1 million threshold in 2018, it will be able to use the 100%-of-last-year’s-tax safe harbor in 2019.
With all tax planning, it is important to consult with your tax professional on these and other strategies. Please contact us if you wish to discuss your individual business needs further.