Business Owner Tax Tips for Year End

Peter VanderWoude, MS, CPA, CGMA

November 1, 2018

With the books closed for October, a business owner usually asks their tax professional to calculate a projected year-end net income and income tax liability. If it has been a profitable year, the owner will want to gauge how much to spend on equipment that can be written off on the tax return to reduce taxes.

With the new tax law for 2018, businesses can, in most cases, claim up to the entire purchase in the first year through bonus depreciation and other enhanced accelerated depreciation write offs. If you have cash available and need the equipment or improvement soon, it makes sense to purchase it and place it in service before the end of the year. Always check with your tax professional before proceeding with year-end purchases.

A time-tested tax planning strategy for cash-basis taxpayers is to delay recognition of income in the current year and increase expense deductions which will postpone a higher tax bill. Reverse this strategy if you expect to be in a higher tax bracket in 2019.

Another common tax savings strategy is to set up a retirement plan such as a SEP-IRA, Simple-IRA or 401(k) plan for deductible contributions. The Simple-IRA plan will have to wait until next year if it is not already in place with an October 1 deadline. For many plans you can set it up now, but wait until your tax return is filed to make the deductible contribution.

The newest tax savings in the 2018 tax law is for sole proprietorship, partnership (including LLCs) or S-corporation income that is taxed on your personal income tax return. It is called the “Qualified Business Income Deduction” or “pass-through income deduction.” This new deduction, which also applies to rental property income, can give you up to a twenty percent tax deduction on the pass-through income of your business. There are a lot of rules and limitations with this deduction and it is best to cover your situation with your tax professional. If your taxable income is below $315,000 (married) or $157,500 (single), then the pass-through deduction is not subject to many of the rules and limitations. You will need wages or other income, besides your pass-through income, to offset the standard or itemized deduction you are taking to get the full twenty percent deduction. For example, if your sole proprietorship nets $100,000 of income and your spouse earns $40,000 in wages, with a $24,000 standard deduction you should qualify for the full twenty percent or $20,000 pass-through income deduction. Not bad! This would decrease to $13,692 if there were no wages to offset the standard deduction.

The key to effective tax planning before the end of the year is to have a current and proper set of bookkeeping records. Now is the time to update your bookkeeping process ultilizing current technology and a cutting edge accounting firm to help you stay that way!    

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