November 12, 2018
As a successful or new business owner, it’s imperative to evaluate your financial situation and perform year-end tax planning and projections while there is still time to be proactive about your tax strategy.
Below are some basic ideas all business owners need to prioritize before December 31st that create potential tax-saving opportunities. Considering many of these are somewhat complex in nature, we encourage you to reach out to one of our experienced LGSH professionals to assist you in the process…before it’s too late.
1. Qualified Business Income Deduction
Section 199A of the Internal Revenue Code provides many taxpayers with a qualifying business deduction of up to 20% of their qualifying business income (“QBI”). These deductions can be from a domestic business operating as a sole proprietorship, partnership, S corporation, trust, or estate.
For taxable income that exceeds $315,000 for a married couple or $157,500 for individuals, there are limitations as to the type of business, taxable income, amount of wages, and the basis of qualifying property. This deduction is one of the greatest benefits of the tax act, yet one of the most confusing, and additional calculations and greater analysis is required to analyze potential benefits.
2. Bonus 100% Depreciation
When purchasing major purchases such as eligible equipment, furniture and computers, careful consideration is also very important. A taxpayer may be able to elect to write off the entire amount of these assets in the year of purchase. This depreciation may also apply to heavier business vehicles. But just be aware, there is a phase out that will begin in 2023.
3. Section 179 Expensing
The new tax act increased the expensing amount of up to $1 million and includes tangible personal property and real property, such as qualifying improvement property, roofs, HVAC, alarm systems, and security systems.
4. Employer Retirement Plans
The implementation of certain retirement plans can dramatically reduce taxes and benefit business owners and their employees. Depending on the needs and desires of the owners/taxpayers, retirement plans can be structured to provide a stronger benefit to the owner and related contributions. Or the plan may be created simply to provide options for employees to contribute to various plans. A defined benefit plan (DBPP or Cash Balance Plan) or a Defined Contribution Plan (401k or profit sharing plan) may be recommended, dependent upon business and employee goals. A Simplified Employee Pension (SEP) may be another viable alternative.
5. Qualified Small Business Stock (“QSSB”)
If a taxpayer owns Qualified Small Business Stock (QSSB) acquired after September 27, 2010, it is possible they may be eligible for a 100% federal gain exclusion on the gain upon sale. This applies if the stock was held for five years and it was a C-Corporation. The taxpayer needs to meet certain criteria when available, however, and this can be an excellent tax-saving vehicle.
6. Timing of Deductions
By accelerating deductions for a cash basis taxpayer, this can lower tax liability for a flow through entity or a C-Corporation and can also be very helpful when trying to qualify for a QBI deduction (as mentioned above). The implementation of a retirement plan can also assist taxpayers, when attempting to qualify for the QBI deduction, and when they may be on the cusp of a deduction. Acceleration of income may also make sense if the taxpayer has losses from other businesses to offset or when it is also known the following year may have higher tax brackets.
7. Choice of Business Entity
When starting a new business the choice of your entity is a very important decision. Under the new tax act, a C-Corporation has a new flat tax rate of 21%, however, the QBI deduction is not available for a C-Corporation. The theory of double taxation still exists in the case of a C-Corporation, although there are still many advantageous fringe benefits for a business owner. When considering the most advantageous structure for a new business entity, careful consideration of the legal implications should be taken into account, otherwise a business may risk the loss tax-saving opportunities.
8. 1031 Exchange
This is not part of the new tax act, but is something that should not be overlooked, especially when there is gain on the sale of real estate that could potentially be rolled into new real estate. The tax rules in this area are complex and need to be carefully followed, but with the guidance of our experienced team at LGSH LLP, a tax savings could be substantial.
9. Opportunity Fund
This is part of the new tax act and as in the case of a 1031 exchange, an Opportunity Fund provides the ability to defer a gain. One of the many differences between this option and the 1031 exchange, is these gains can be generated from a business or other investments such as stocks and mutual funds.
As an example, if you invest in this fund for only five years, you would be able to exclude 10% of the gain from taxation. If you invest for seven years, another 5% would be excluded and finally if you stay in the Fund for the full 10 years, the gains generated would be tax free. Please note: The tax on the original deferred gain would still be due in 10 years if it is held.
10. Expand your Research and Development (R&D)
You don’t have to be a drug manufacturer or a technology company to invest in research and development. Whether you do R&D to develop a product, or simply find new methods for your operations by creating internal-use software, you may qualify for a tax credit that could help underwrite the cost of your research.
A “qualified small business” can opt to use the R&D credit to offset to the employer’s share of Social Security taxes (up to $250,000), rather than using it against income taxes. Which business is qualified? The business with less than $5 million in gross receipts for the current year and no gross receipts for any year, preceding the fifth year prior to the current year. For example, a business that has $4 million in gross receipts in 2017 and has no gross receipts prior to 2012 may use this option.
Please contact our R&D Specialists at LGSH LLP at (818)783-0570 or email us at firstname.lastname@example.org to learn more about the value of these potential R&D credits and other tax planning strategies you do not want to miss!