Tax Planning 2018: What Small Business Owners Need to Know

Are you a business owner seeking to better understand the implications of the Tax Cuts and Jobs Act (TCJA) on your 2018 taxes? We have identified 4 key areas to discuss with your accountant to create a thoughtful tax planning strategy focused on reducing your business income tax bill.

1. Business Structure

Tax Planning 2018 - Slattery and Holman

The TCJA amplifies tax implications associated with the various structures available for businesses. Many C-corporations will see lower income taxes under the new flat income tax rate of 21%. Since prior rates ranged from 15% up to 39%, the initial reaction to this change has been favorable. However, before changing your business structure, it is important to note that C-corps are still subject to double taxation. After the corporation pays tax on its profits, the owners are also required to pay taxes on any dividends, at a federal tax rate of up to 23.8%.

For businesses structured as an S-Corp, Partnership, Sole Proprietorship, or Limited Liability Company (LLC), the TCJA includes a 20% Qualified Business Income Deduction. This deduction acts like a tax cut to these pass-through entities, whose owners pay tax on business income through their personal tax returns.

  • The deduction is fully realized if income levels are less than $315,000 for joint returns or $157,500 for single filers.
  • In general, the deduction is 20% of business income, subject to limitations based on wages and investment in property and equipment.
  • In general, service businesses do not qualify for the deduction. This includes those in health, law, accounting, performing arts, consulting and athletics, as well as those in financial, brokerage and investment services.
  • When taxable income on the business owner’s 1040 is below $315,000/$157,500, neither the wage limitation nor the provision disallowing the deduction for service businesses apply.

Reviewing your business income, wages and industry sector with your tax accountant can help determine the most favorable structure for your company.

2. Client Entertainment ChangesTax Planning 2018 what small business owners should know
A notable change now impacts the deductions associated with client entertainment. In 2018, client entertainment expenses such as golfing or sporting event tickets are no longer deductible. However, food and beverages shared with clients or potential clients are 50% deductible if the following conditions are satisfied:

  • The expense is an ordinary and necessary expense in conducting business;
  • The expense is not lavish or extravagant;
  • The taxpayer, or an employee of the taxpayer, is present at the furnishing of food or beverages;
  • The food and beverages are provided to a current or potential business customer, client or similar business contact;
  • In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment.

Your tax accountant can offer additional clarification about client meal and entertainment deductions.

3. Acquiring and Depreciating Assets
New TCJA rules make it a good time to invest in some types of assets. Under changes made to bonus depreciation and 179 expensing rules, you can now deduct purchases of qualified property during the year it’s placed in service. ‘Qualified property’ includes the following items when purchased for business use:

  • Equipment / Machines
  • Certain vehicles
  • Computers and non-proprietary / off-the-shelf software
  • Office furniture and equipment
  • Some improvements such as roofing, HVAC, security systems and fire protection systems

The TCJA increased first-year bonus depreciation to 100% of qualified purchases made after September 17, 2017. Unlike previous years, the 2018 Bonus Depreciation can also be applied to used equipment if it’s ‘new’ to you. Your tax accountant can confirm qualifying purchases and provide counsel about potential fourth-quarter activity that will help you get the most out of this tax-saving strategy.

4. Accounting Method

The new tax law allows more flexibility for small businesses to choose the optimal accounting method for their business. Now businesses with revenue up to $25 million can use cash basis accounting. This opens the cash method option up to many businesses not allowed to use it under the old rules.

The cash basis method records revenues when payment is received and when expenses are paid. This method doesn’t require you to record account receivables or payables. Cash basis accounting matches the taxation of the income with the receipt of the cash.

Another benefit to the cash method of accounting is its flexibility. If you are able to work with vendors, you can time the payment of invoices to take the deduction in the year you choose. This is especially helpful in years where tax rates are changing or when you expect large fluctuations in income.

If you decide to shift from accrual to cash accounting, it is often still important to continue to track income and expenses on accrual basis for operational reasons. A long-term perspective about business operations is vital to forecasting, planning and maintaining strong banking relationships.

The team at Slattery & Holman can help you capture the benefits of the 2018 tax changes. We will also work with you to ensure effective business tax planning strategies for 2019.

Contact us today to set up a convenient time to connect.