Year-End Tax Planning
I truly hope everyone is having an enjoyable holiday season filled with hot cocoa and lots of time with family and friends. Of course, this time of year is the perfect time to work on your tax numbers! I know, it may not sound like lots of fun, but a few well-chosen areas of focus could have a huge impact on what you end up paying come tax time. This post outlines four areas to review and adjust for your business, if needed, to take advantage of the new tax law (and make sure you have paid enough to be in a good tax situation).
1. Fully fund retirement plans.
Calculate whether or not you (the business owner) has fully funded all retirement plans available to you. If not, you might be leaving good money on the table. Also, have you evaluated the funding of employee-related tax accounts? Some of the executive compensation funding vehicles are set up so you don’t have to put the cash in until next year, but you need to plan and calculate for that now to make sure you are maximizing your money.
2. Understand cash versus accrual basis.
Some taxpayers report on a cash basis and some on an accrual basis for federal income tax.
Cash Basis: If you are on the cash basis of accounting, you want to do everything you can to prepay your expenses and purchases as much as possible right now, even if you will not use it until next year. For example, many of our retail clients are buying inventory, stocking up on supplies, and preparing advertising materials even though the income will not come until 2019. They can pay for expenses with credit cards (or cash) now and those items are deductible this year. If you have any major projects or purchase commitments you know you are going to do in 2019 and you are on a cash basis, look at buying now.
Accrual Basis: Conversely, those on the accrual basis for tax purposes can accelerate deductions or defer income into future years without actually having to expend or receive cash. For example, if you are a wholesale distributor, you may receive orders and payments now for customer orders (say for lumber or widgets), but if you wait to deliver your items until Jan 1st you won’t recognize any revenue until 2019. So, even though you have received payment and collected sales orders, the income doesn’t get counted until later, when you actually ship or deliver the merchandise. Timing sales and the deferral of income into the future year can be a big advantage – (especially for many of our construction clients in particular). If you are on the accrual basis, you can order things but not pay until next year. You still get the tax deduction, but don’t have to pay for 60 or 90 days so you keep the cash. You don’t have to spend the money, just order and have it shipped to you.
3. Use special deductions for large equipment, fixtures, and furniture purchases
You can get deductions for heavy items of equipment, machinery, or other big improvements (and lots of small ones, too). If you bought qualifying equipment, furniture or similar items and have a loan (maybe amortizing over time) it is important to discuss those items with your accountant. If we plan ahead, are careful about the way things are structured, and understand what they are, we may be able to deduct all those items currently, which we want to do so you can reap the tax benefits right now. Look for: new vehicles, trucks, equipment, machinery, tooling, furniture, computers and servers and other upgrades or improvements; in short, many of the things you would normally purchase for your business
4. Check out QBID
There is a new deduction this year for small businesses called the Qualified Business Income Deduction (QBID). Not everyone qualifies for this (for example, it is generally not available for service businesses), but companies focused on building things, making or designing stuff, manufacturing parts, engineering (and typically anyone buying equipment and big capital expenditures) get a special 20% QBID deduction for tax purposes. Obviously, that is very significant! We want to know how that will impact the taxes you owe and prepare up front to make sure you qualify for this benefit. For example, payroll can have a huge impact on qualifying for this deduction (and if your compensation systems are set up incorrectly, it may mean you miss out on a significant benefit for your business, which we do not want). A lot of business owners have more than one business, with one large entity that handles the payroll for all the companies. Unfortunately, if you don’t have enough payroll expense in the qualifying company you can’t maximize the QBID.
As you can see, each of these items is a large category with a lot of moving parts, which is why it is important to work with your accountant to ensure your business(es) are set up for success. And, the best news is, that means even more time you can spend with family this holiday season! Instead of you having to spend a lot of time digging through the details on this, send me an email. Our team would be happy to take this on to ensure you maximize your tax planning now for a profitable and happy 2019.
