As the end of the year approaches, many small business owners are looking for ways to minimize their tax burden for the upcoming year. This is especially true now, as the GOP tax overhaul went into effect in 2018, changing the way business income is calculated, what deductions you can take, and more. And while you should always talk to a tax expert before making any major changes in your business plan, here are a few suggestions about what you might want think about in the coming weeks.
Learn What Deductions You Can Take
Beginning this year, many small businesses qualify for a 20 percent deduction on their federal income tax return. However, only “pass-through” businesses (in which income tax is reported and paid by the owner and not the business itself) qualify. The deduction applies to the lesser of your qualified business income (income minus expenses) and your taxable income (minus capital gains.)
There are caveats, however, and the deduction isn’t available to everyone. If your taxable income is no greater than $157,500 ($315,000 if filing jointly), chances are you qualify. But if you are a service business (for example, a physician, attorney or CPA) and your income exceeds this threshold, the amount of your deduction will be reduced. The deduction disappears entirely for some business owners whose income exceeds $207,500 ($415,000 for those filing jointly).
Bear in mind, too, that the corporate tax rate was slashed this year, from 35 percent to 21 percent. So while the 20 percent deduction is a nice bonus for pass-throughs, high income earners in certain industries may want to consider changing the structure of their business for 2019.
Look Into Employer-Sponsored Retirement Plans
Even if you have maxed out your contributions to a personal IRA for the year, you may enjoy additional tax savings by starting or adding to an employer-sponsored retirement plan, such as a SEP IRA, SIMPLE IRA, or 401(k). These types of plans differ in their complexity as well as the cost and ease of setting them up, so speak with your accountant or tax adviser about which one might be right for you. In each case, some of the contributions you make for yourself or your employees may be tax deductible if you act before the end of the year.
Maximize Deductions for Equipment
Thanks to the new tax laws, businesses are entitled to a tax deduction of up to $1 million for purchases of new or used equipment this year — nearly twice the $510,000 allowable deduction last year. Just make sure the equipment is placed in service before the end of the year.
Since the increased deduction is intended for small businesses, there is cap on how much you can deduct. The deduction begins to decrease at expenditures of $2.5 million and ends at $3.5 million. However, the new tax law also increased the depreciation deduction — from 50 to 100 percent — for certain kinds of equipment if you bought it and put into service before September 27, 2017. In some cases, you may also be allowed to take a bonus 40 percent depreciation deduction for equipment purchased after September 28, 2017, and put into service during 2018.
If your business is bringing in more revenue this year than in previous years, you may realize some tax savings by deferring some revenue until early next year. You can do this very simply by holding off on deliveries, sending out bills a little later this month, or working with clients to defer the start of a project until after the first of the year.
Conversely, if you anticipate that you will bring in considerably more revenue next year than in 2018, you may want to consider offering some clients deferred billing this month or putting off deductible expenses until after January 1.
In any case, it’s important to plan for how you will pay any taxes you owe. If you anticipate a large tax bill, start saving now, or consider applying for a loan if you don’t think you will be able to save enough to meet your obligation to the IRS by April 15. You may also want to speak with your accountant about paying quarterly estimated taxes next year.
About The Carmoon Group
The Carmoon Group Ltd. is a minority-owned insurance broker headquartered in Hicksville, New York. Through a large network of partners and associates, we service businesses all across the United States and beyond, offering comprehensive business insurance programs and risk management solutions at an affordable price. Please give us a call to set up an appointment to discuss your needs. Or, if calling isn’t convenient, just reach out online and we will get back to you right away.