Year-end Tax Planning for Your Business’ Future

Expert Advice from Tax Partner, Karen Delle Site

With the major changes to the tax rules thanks to the Tax Cuts and Jobs Act passed late last year, there is even more to discuss than in other years. This act reduced the corporate tax rate to 21% and removed the corporate Alternative Minimum Tax (AMT) while relaxing expense and depreciation rules. And there is a new deduction for taxpayers with business income from pass-through entities. Much to discuss and plan for! Let’s look at a few:

Expensing of Assets has Become More Liberal

If the cost of a unit of property doesn’t exceed $2,500 ($5,000 if the business has a certified audited financial statement) the business can take advantage of the de minimis safe harbor election to expense the entire cost without capitalizing and depreciating.

For larger purchases of new assets (other than buildings) including computer software, the expense limit is $1,000,000 beginning in 2018 on investments of no more than $2,500,000. This means that a business can deduct the entire cost of assets without regard to when during the year they are purchased, subject to net income. If there is not enough income to fully deduct in the current year the amount is carried forward until deducted when income is available to offset.

Bonus depreciation is another option if net income is an issue. 100% of the cost of machinery and equipment (new or used) can be taken without regard to net income, also without regard to when placed in service.

More “Small Businesses” Can Use the Cash Method

To qualify as a “small business” switching to the cash method of accounting (as opposed to accrual), the business gross receipts for the past three years cannot average more than $25 million annually (as opposed to the prior limit of $5 million). Cash basis taxpayers have more flexibility in shifting income and accelerating expenses than accrual basis taxpayers.

Qualified Business Income (QBI)

For taxpayers with pass-through income, the new QBI deduction allows them to a deduction of up to 20% of their QBI subject to phase-out if the taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers.

Deferring income or accelerating deductions could be used to ensure the above limits are not reached, allowing the full benefit of this deduction.

Other Potential Methods of Reducing 2018 Taxable Income

Disposing of a passive activity in 2018 to allow you to deduct suspended losses from prior years.

Deferring a debt-cancellation event until 2019.