Business Tax Planning Tips

We have compiled the following actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make.

Prepare Your Information Reporting

You should start gathering information early this year to make sure you can complete your mandatory reporting on time. Congress has enacted new legislation that more than doubles most penalties for late or incorrect information returns. This includes the Form W-2 employers must provide to all employees and the Form 1099 a business must provide to any contractor it pays at least $600 for services. These returns are due to recipients by Jan 31 and the IRS soon after. If the 1099is reporting nonemployee compensation in box 7 the form is due to the IRS and the recipient by Jan 31.

Timing of Income and Deductions is Key

Why pay tax now when you can postpone it & pay later? In general, deferring income and accelerating deductions provide a tax benefit to the current year. However, this strategy may only benefit the initial year because effectively the company starts year 2 by recording the previous deferral as income. This “kick the can” strategy can provide benefits if implemented correctly and monitored, but it also has the potential to backfire. Rikard & Neal can help you identify whether the rewards are worth the cost to implement based on your unique situation.

When to Purchase Equipment? Does it Matter?

For tax years beginning in 2018, the expensing limit is $1,000,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $2,500,000. The expensing limitation for rental properties has been repealed under recent tax reform.

Since Congress passed a permanently high ceiling of $1 million, taxpayers with planned asset acquisitions below the limit can fully deduct purchases assuming the company has enough income to allow the deduction (i.e. Section 179 cannot create a loss). If the income limitation applies, the deduction is suspended indefinitely until the company has sufficient income to allow the deduction.

Be aware that vehicle purchases have their own unique issues and limitations that may apply. For example, the 179 expense limit on the purchase of an SUV cannot exceed $25,000 per vehicle. If the vehicle is a “luxury automobile” then the expense limit for 2018 is only $10,000.

The TCJA tax reform also increased bonus deduction to 100% through 2022. The new law also removed the requirement that assets have their initial use begin with the taxpayer. That means 100% bonus applies to virtually any acquisition of personal property and even qualified leasehold improvements. This appears to make the decision easy because the taxpayer can deduct 100% of any acquisition of personal property. What is the catch you ask? One issue is that some states did not agree or conform to these changes. Also AMT depreciation may be impacted based on the Sec 179 vs. bonus decision.

If you are contemplating a potential large asset purchase and would like to know all the variables and tax consequences for current and future years Rikard & Neal can help with the structure and timing of the purchase to provide the maximum tax benefit.

Take Advantage of the “deminimis Safe Harbor Election” for Assets

Businesses may be able to take advantage of the "deminimis safe harbor election" (also known as the book-tax conformity election) to expense the costs of inexpensive assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. The limit was just increased by the IRS so that individual asset purchases or supplies whose cost do not exceed $2,500 may be expensed instead of capitalized.

Keep in mind that in order to take advantage of this deduction these deminimis assets must be expensed for financial reporting purposes as well as tax purposes. This treatment will result in lower net income and equity on the company financials, which may impact the ability of the company to borrow capital or meet benchmarks set by regulatory agencies or loan current loan covenants.

Maximize the New 20% Qualified Business Income Deduction

Tax Cut and Jobs Act enacted at the end of 2017 created a new deduction equal to 20% of income from qualified businesses. Generally, “qualified business income” is trade or business income from partnerships, S corporations, and sole proprietorships. Rental activities may also be included if they can be considered a trade or business of the taxpayer. Qualified business income does not include reasonable compensation or guaranteed payments paid to the taxpayer. This deduction is applied at the individual level for owners, partners, and/or shareholders on their personal tax return. There are limits on the deduction once taxable income exceeds $157,500 for single/head of householder taxpayers and $315,000 for married filing joint taxpayers especially if the business is a specified service business. There are many strategies for taxpayers to fully avail themselves of this new deduction, but every taxpayer’s case is unique. Rikard & Neal can evaluate your scenario and provide guidance to maximize potential tax benefits for your situation.

Vehicle Deductions and Substantiation

Expenses relating to vehicles used in a business can add up to major deductions. The deductions are generally calculated using one of two methods: the standard mileage rate method or the actual expense method.

Since the IRS tends to focus on vehicle expenses in an audit and disallow them if they are not properly substantiated, you should ensure that you document all of the following: 1) the amount of mileage for each business use (including the date) and the total miles for the tax period; 2) the business purpose for the mileage; and 3) the amount of each separate expense (if you are using the actual expense method).

The IRS only considers records such as a log or diary to be adequate if they are made at or near the time the expense is incurred.

S Shareholder Salaries

The IRS is continuing to scrutinize the salaries, or lack thereof, paid to S Shareholder-employees. If you are actively involved in the S Corporation, you must be paid a “reasonable compensation” for your services and pay the appropriate payroll related taxes. The issue is that W-2 wages are subject to payroll taxes while pass through earnings from an S corporation are not. If you are in this situation, you should document the factors used to support your salary. Factors to consider include hours worked and duties performed in relation to other employees and how your performance influences the earnings of the business.

Health Insurance for Owners

Business owners garner special treatment for health insurance provided certain rules are met. Self-employed taxpayers may deduct premiums for medical, dental, and qualifying long-term care coverage for themselves and their family. This deduction avoids income limitations that apply to medical expenses and is available even if the taxpayer does not itemize deductions.

There are a few rules that need to be followed in order to qualify for the deduction. First the taxpayer may not take this deduction for any month he/she is eligible for coverage under a plan maintained by an employer of either the taxpayer or his/her spouse. Second the deduction applies to premiums for a plan established under the business and is limited to the earned income from that business. Medicare premiums for both spouses, as well as supplemental policies may be eligible for the deduction.

In order to meet the second requirement generally the business must pay for the insurance premiums. The policy does not need to be a group policy maintained by the business. The insurance policy can be in the name of shareholder / partner. If the business is organized as a partnership payments for the partner’s health insurance will be treated as guaranteed payments reducing business income. If the business is an S Corporation the payments for a more than 2% shareholder’s health insurance must be added to a W-2 and increasing the deduction for wages and reducing business income. If the company uses an outside payroll service such as ADP or Paychex then service provider will need the shareholder insurance paid to include on the W-2. If the W-2’s do not include the shareholder’s insurance they must be corrected to take the deduction.

Retirement Plans

Retirement plans are one of the last remaining tax havens in the Internal Revenue Code. A good retirement plan not only helps you attract and retain qualified employees, it also allows the company owner(s) to defer a significant amount of income. A well-structured plan allows a majority of contributions to be allocated to company owner(s). The tax deferral from plan contributions often exceeds initial plan setup costs and continuing administrative costs. Every business has different needs and goals for retirement plans due to size, entity type, income levels, and workforce age. Options range from Simple plans that require very little upfront time, cost, and administration to complex defined benefit plans that require actuarial calculations, annual tax filings, and significant administrative fees. Rikard & Neal can help determine what plan is the best fit for the situation.