Year-End Tax Planning Strategies for Businesses & Business Owners

With year-end fast approaching, now is an ideal time to consider some significant tax savings strategies that could help you lower this year’s tax bill and possibly next year’s as well.

The recently enacted Tax Cut and Jobs Act (TCJA) made major changes to federal tax law for businesses, including creating a single tax rate of 21% for “C” corporations and establishing limits for business interest deductions. It also created a variety of tax savings opportunities for small to medium size businesses.  Here are several tax saving ideas that you might consider implementing before year-end.

The New 20% Qualified Business Income Deduction

Proprietors, shareholders and partners in a trade or business, including rental operations, may be entitled to a deduction on their personal federal tax returns of up to 20% of “qualified business income”.  The deduction can produce significant tax savings but is subject to various limitations and phaseouts based on dollar thresholds.  You may be able to avoid the 2018-dollar thresholds by deferring income or accelerating deductions.  Your business may also be able to increase the new deduction by increasing employee wages or equipment purchases before year-end.

The Cash Method of Accounting

More “small businesses” will be able to use the cash method of accounting (as opposed to the accrual method) than were able to do so in previous years. The cash method of accounting can both simplify record-keeping and produce tax benefits not available under the accrual method. To qualify as a “small business”, the business’s average annual gross receipts over the previous three-year tax years can’t exceed $25 million (the prior dollar limitation was $5 million).

Expensing New Business Property and 100% Bonus Depreciation

TCJA generously increased the dollar ceiling of expenditures that qualify for business property expensing and/or 100% bonus depreciation.  Under the new law, expensing is now generally available for most depreciable property other than buildings.  It is also available for qualified improvement property including improvement to a building’s interior, roofs, HVAC, fire protection, alarm, and security systems (but excluding enlargement of a building, elevators, escalators, or internal structural framework).  Small and medium sized businesses that make purchases before the end of the year will be able to deduct most, if not all, their outlays for machinery and equipment.

Businesses may also be able to take advantage of the de minimis safe harbor amount to expense the costs of lower-cost assets and materials and supplies, assuming the costs don’t have to be capitalized. To qualify for the election, the cost of a unit of property can’t exceed $2,500.

One or more of these strategies may work for you, but tax strategies are never a one-size-fits-all; we encourage you to contact us at your earliest convenience to discuss tax-saving moves that make sense for you and your business.