As the year concludes, the focus for many business owners turns to tax planning given the numerous changes in the tax law under the Tax Cuts and Jobs Act of 2017 (TCJA). Here are five year-end tax planning considerations for business owners:
1. The allowable deduction for businesses under Internal Revenue Code Section 179 for the full purchase price of qualifying equipment and/or software purchased during 2018 increased from $500,000 to $1 million. The allowable deduction now begins to phase out, dollar for dollar, once total asset purchases reach $2.5 million. And, qualified asset purchases (which now includes purchased new or used property) made after September 27, 2017 may qualify for 100 percent bonus depreciation. These increases could prove valuable to businesses seeking to expand.
2. Consider converting to a C corporation. The TCJA permanently decreased the top C corp tax rate from 35 percent to 21 percent. However, keep in mind the effect of double taxation applicable to C corps, which occurs when C corp owners are taxed on the dividend income received from the entity – income that’s already been taxed at the C corp level.
3. Review tax-attribute carryovers, such as net operating losses, capital losses, tax credits, and charitable contributions to determine if any are expiring and to what extent they can be used in 2018. The net operating loss (NOL) deduction for NOLs arising in 2018 is now limited to 80 percent of taxable income. Under previous law, NOLs could be carried back two years and forward 20 but TCJA eliminates NOL carrybacks and allows unused NOLs to be carried forward indefinitely.
4. Pass-through entity owners such as partnerships, S-Corps or sole proprietorships may be entitled to a maximum 20% deduction of domestic “qualified business income.” The deduction reduces taxable income, not adjusted gross income, and eligible taxpayers are entitled to the deduction whether or not they itemize. S-Corp shareholders should determine their eligibility for the 20% qualified business income deduction and then review year-end compensation to distribute business profits, as well as meet 2018 estimated tax requirements through final income tax withholdings.
5. Cash basis taxpayers may accelerate deductions by prepaying certain expenses before year-end. Also, credit card charges incurred before year-end may be deducted in 2018 and paid in 2019.
There are over 130 new tax provisions in the TCJA. Business owners are faced with the opportunity and challenge of maximizing their tax benefits under the new law. PLDO attorneys are well versed in tax law, wealth management and asset protection, and other business planning strategies. For assistance, please contact Attorney Jason S. Palmisano at 561-362-2034 or email [email protected].
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