2018 Year End Tax Planning for Businesses
As year-end approaches, each business should consider the many opportunities that might be lost if year-end tax planning is not explored. A business may want to consider several general strategies, such as use of traditional timing techniques for delaying income recognition and accelerating deductions. A business should also consider customized strategies tailored to its particular situations.
Depreciation and expensing. TCJA made some significant changes to encourage businesses to expand and invest in new property. First-year depreciation allowances on certain business property, or bonus depreciation, has fluctuated over the last few years, but TCJA provides for 100 percent bonus depreciation for property placed in service before 2023. Additionally, the limitation on expensing certain depreciable assets has been increased to $1 million, with a $2.5 million investment limitation. While 2018 is not necessarily the last time these benefits will be available, there has been no better time than 2018 to take advantage of them.
Qualified business income deduction. Beginning in 2018, business owners may deduct up to 20 percent of their qualified business income (QBI) from sole proprietorships, partnerships, trusts, and S corporations. This is one of the centerpieces of TCJA and broadly applies to many taxpayers. The IRS has released comprehensive guidance on the deduction, which provides a great deal of clarification on the requirements of the deduction. This is a completely new deduction, with new documentation requirements, which may require a year-end review of records.
Family Leave Credit. TCJA also created a new credit for employers making family leave payments to employees. The credit is only available to employers who have a written policy in place for the payment and credit. The IRS has issued guidance allowing the credit to be claimed for all of 2018 by employers who have a written policy in place before the end of 2018. Employers who make these payments, and want to claim the credit, still have time to create the policy.
Employee benefits. TCJA made a large number of changes on the individual side relating to benefits that could impact employers. Employees can no longer claim miscellaneous itemized deductions, cannot generally exclude moving expense reimbursements, and the deduction for business meals and entertainment was also impacted. Employers should review their internal policies to determine if they need to be changed to reflect the changes.
Bad Debts. If you use the accrual method, you can accelerate deductions into 2018 by analyzing your business accounts receivable and writing off those receivables that are totally or
partially worthless. By identifying specific bad debts, you should be entitled to a deduction. You may be able to complete this process after year-end if the write-off is reflected in the 2018 year-end financial statements. For non-business bad debts (such as uncollectable loans), the debts must be wholly worthless to be deductible, and will probably only be deductible as a capital loss.
Qualified Business Income Deduction. The 2017 tax act added a new deduction for individuals, trust, and estates who are owners of non-C corporation businesses. The deduction is for qualified business income in addition to qualified publicly traded partnership income, qualified REIT dividends and income of, or received from, certain agricultural and horticultural cooperatives.
Self-Employed Health Insurance Premiums. Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses, and their dependents as an above-the-line deduction, without regard to the general 7.5%-of-AGI floor. Self Employed Health Insurance includes eligible long-term health care premiums.
Home Office Deduction. For self-employed individuals, expenses attributable to using the home office as a business office are deductible if the home office is used regularly and exclusively: (1) as a taxpayer’s principal place of business for any trade of business, (2) as a place where patients, clients, or customers regularly meet or deal with the taxpayer in the normal course of business, or (3) in the case of a separate structure not attached to the residence, in connection with a trade or business. If you have been using part of your home as a business office, we should talk about the amount of any deduction you would like to take because an IRS safe harbor could be used to minimize audit risk.
NOL Carryforward Period. If your business suffers net operating losses for 2018, you generally are able to carry forward those losses against taxable income indefinitely. Carrybacks are generally disallowed with exceptions for farming and non-life insurance companies, which can be carried back two years.
Inventories Subnormal Goods. You should check for subnormal goods in your inventory. Subnormal goods are goods that are unsalable at normal prices or unusable in the normal way due to damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including second-hand goods taken in exchange. If your business has subnormal inventory as of the end of 2018, you can take a deduction for any write-downs associated with that inventory provided you offer it for sale within 30 days of your inventory date. The inventory does not have to be sold within the 30-day timeframe.
Small Employer Pension Plan Startup Cost Credit. Certain small business employers that did not have a pension plan for the preceding three years may claim a nonrefundable income tax credit for expenses of establishing and administering a new retirement plan for employees. The credit applies to 50% of qualified administrative and retirement-education expenses for each of the first three plan years. However, the maximum credit is $500 per year.