Article Summary: Start the new year off right and make sure you're covered with your small business taxes. Take a look back and plan for the future. Here are 5 things you shouldn't ignore.
- Identify Applicable Tax Law Changes
- Weigh Advantages and Drawbacks of Deferred Income
- Maximize Business-Related Tax Breaks
- Analyze Accelerated Depreciation Options
- Obtain a Second Opinion to Identify Missed Deductions
The year has just begun and making sure you did everything you could last year to optimize your small business taxes is a good way to start the year. The last few weeks were filled with holiday parties, family get-togethers and holiday gift shopping, but hopefully you left just enough room for some 2019 preparations. As a small business owner, you know not to neglect the job of planning for the upcoming tax season, but you should make it a priority to address the five tax-related tasks listed below.
1. Identify Applicable Tax Law Changes
While each year produces a fresh set of tax code changes, The Tax Cuts and Jobs Act (TCJA) passed in 2017 and fully implemented in 2018 represents one of the biggest changes in the federal income tax code in decades. A full analysis of the extensive changes associated with TCJA that affect your specific business deserves a serious discussion with your accountant. However, there are two major changes that especially impact small business owners: Qualified Business Income Deductions and Meals and Entertainment Deductions.
- Qualified Business Income Deduction – Qualified entrepreneurs and companies, including sole proprietors and S-corporations, that report pass-through business income can now claim a 20 percent business income deduction. However, single business owners must have taxable income below $157,500 to qualify for the full deduction; the limit for married business owners filing jointly is $315,000. To further complicate matters, what the IRS designates as “specified service trades or businesses,” including physicians and attorneys, are ineligible for the deduction in their taxable income exceeds $207,500 if single or $415,000 if married filing jointly.
- Meals and Entertainment Deductions – Under the former tax code, business owners and entrepreneurs were able to deduct 50 percent of meals and 50 percent of the face value of business-related entertainment events. However, TCJA has eliminated the events deduction while leaving the deduction for meals intact. In other words, if you treat a client to box seats for a local sporting event, that expense is no longer deductible.
Your accountant or tax professional can provide more info on these and other changes in the federal tax code. One important caveat for business owners and entrepreneurs is that on August 8, 2018, the IRS pulled the plug on so-called crack-and-pack maneuvers utilized by business owners to take advantage of the Qualified Business Income Deduction.
For instance, before August 8, a law or medical practice whose income would otherwise be too large to qualify might attempt to spin off different divisions such as bill collection or administrative functions into separate entities that would have incomes low enough to qualify for the deduction. Such maneuvers will no longer fly with the IRS. If your accountant or tax professional suggests a crack-and-pack maneuver, find someone else to prepare your taxes.
While TCJA is the tax-related elephant in the room for 2018 and beyond, other tax federal, state or municipal law changes may also impact your business operations. It’s worth setting an appointment with your accountant or tax professional to sort everything out.
2. Weigh Advantages and Drawbacks of Deferred Income
Under federal tax law, income received on or before December 31 is included in the present tax year. If you anticipated that this year’s income will be significantly lower than last year’s income, it may have been worthwhile to defer December payments and accounts receivable until after January 1 to lower your income for this year. This is why we suggest staying in touch with your accountant or tax professional all year round.
3. Maximize Business-Related Tax Breaks
Failure to take advantage of all the tax breaks to which you are legally entitled is leaving money on the table, a practice which few business owners or entrepreneurs can afford. Easily missed deductions include purchases of business-related books, magazines, in-kind charitable deductions and purchases of office supplies. Just be sure to retain your receipts. If you’re unsure about whether you qualify for a given deduction or credit, err on the side of caution. Collect and retain any receipts or documentation, and present them to your accountant or tax preparer. He or she should be able to make a determination.
4. Analyze Accelerated Depreciation Options
TCJA also instituted significant changes to allowable depreciation allowances beginning in 2018. Section 179 allowances for equipment purchased and placed into service during 2018 increased from $510,000 to a cool $1 million. Heavy SUVs, trucks and vans with a Gross Vehicle Weight Rating (GVWR) of more than 6,000 pounds that are used more than 50 percent for business that were placed into service during 2018 now qualify for a 100-percent bonus deduction. Likewise, qualifying new and used business-related assets placed into service during 2018 also qualify for a 100-percent bonus deduction. Like nearly ever other aspect of the tax code, this section of TCJA includes complex caveats. Unless you are a trained certified public accountant or tax attorney, you should not attempt to navigate accelerated depreciation on your own.
5. Obtain a Second Opinion to Identify Missed Deductions
Tax regulations are complex. Even diligent entrepreneurs and business owners are almost certain to miss important deductions or tax breaks. It is definitely worth the money to have a CPA or tax attorney look over your financial documents, including tax returns, to determine if you are eligible for additional tax breaks, or if one or more items present potential additional tax obligations. Consider it an investment that could spare you endless headaches down the road — not to mention potentially save you thousands of dollars.