...For tax years beginning after 2017, taxpayers other than
corporations may be entitled to a deduction of up to 20% of their qualified
business income. For 2018, if taxable income exceeds $315,000 for a married
couple filing jointly, or $157,500 for all other taxpayers, the deduction may
be limited based on whether the taxpayer is engaged in a service-type trade or
business (such as law, accounting, health, or consulting), the amount of W-2
wages paid by the trade or business, and/or the unadjusted basis of qualified
property (such as machinery and equipment) held by the trade or business. The
limitations are phased in for joint filers with taxable income between $315,000
and $415,000 and for all other taxpayers with taxable income between $157,500
and $207,500.
...Taxpayers may be able to achieve significant savings by
deferring income or accelerating deductions so as to come under the dollar
thresholds (or be subject to a smaller phaseout of the deduction) for 2018.
Depending on their business model, taxpayers also may be able increase the new
deduction by increasing W-2 wages before year-end. The rules are quite complex,
so don't make a move in this area without consulting us.
...More "small businesses" are able to use the
cash (as opposed to accrual) method of accounting in 2018 and later years than
were allowed to do so in earlier years. To qualify as a "small
business" a taxpayer must, among other things, satisfy a gross receipts
test. Effective for tax years beginning after Dec. 31, 2017, the gross-receipts
test is satisfied if, during a three-year testing period, average annual gross
receipts don't exceed $25 million (the dollar amount used to be $5 million).
Cash method taxpayers may find it a lot easier to shift income, for example by
holding off billings till next year or by accelerating expenses, for example,
paying bills early or by making certain prepayments.
...Businesses should consider making expenditures that
qualify for the liberalized business property expensing option. For tax years
beginning in 2018, the expensing limit is $1,000,000, and the investment
ceiling limit is $2,500,000. Expensing is generally available for most
depreciable property (other than buildings), and off-the-shelf computer
software. For property placed in service in tax years beginning after Dec. 31,
2017, expensing also is available for qualified improvement property
(generally, any interior improvement to a building's interior, but not for
enlargement of a building, elevators or escalators, or the internal structural
framework), for roofs, and for HVAC, fire protection, alarm, and security
systems. The generous dollar ceilings that apply this year mean that many small
and medium sized businesses that make timely purchases will be able to
currently deduct most if not all their outlays for machinery and equipment.
What's more, the expensing deduction is not prorated for the time that the
asset is in service during the year. The fact that the expensing deduction may
be claimed in full (if you are otherwise eligible to take it) regardless of how
long the property is held during the year can be a potent tool for year-end tax
planning. Thus, property acquired and placed in service in the last days of
2018, rather than at the beginning of 2019, can result in a full expensing
deduction for 2018.
...Businesses also can claim a 100% bonus first year
depreciation deduction for machinery and equipment—bought used (with some
exceptions) or new—if purchased and placed in service this year. The 100% write-off
is permitted without any proration based on the length of time that an asset is
in service during the tax year. As a result, the 100% bonus first-year write-off
is available even if qualifying assets are in service for only a few days in
2018.
...Businesses may be able to take advantage of the de
minimis safe harbor election (also known as the book-tax conformity election)
to expense the costs of lower-cost assets and materials and supplies, assuming
the costs don't have to be capitalized under the Code Sec. 263A uniform
capitalization (UNICAP) rules. To qualify for the election, the cost of a unit
of property can't exceed $5,000 if the taxpayer has an applicable financial
statement (AFS; e.g., a certified audited financial statement along with an
independent CPA's report). If there's no AFS, the cost of a unit of property
can't exceed $2,500. Where the UNICAP rules aren't an issue, consider
purchasing such qualifying items before the end of 2018.
...A corporation (other than a "large"
corporation) that anticipates a small net operating loss (NOL) for 2018 (and
substantial net income in 2019) may find it worthwhile to accelerate just
enough of its 2019 income (or to defer just enough of its 2018 deductions) to
create a small amount of net income for 2018. This will permit the corporation
to base its 2019 estimated tax installments on the relatively small amount of
income shown on its 2018 return, rather than having to pay estimated taxes
based on 100% of its much larger 2019 taxable income.
...To reduce 2018 taxable income, consider deferring a
debt-cancellation event until 2019.
...To reduce 2018 taxable income, consider disposing of a
passive activity in 2018 if doing so will allow you to deduct suspended passive
activity losses.
These are just some of the year-end steps that can be taken
to save taxes. Again, by contacting us, we can tailor a particular plan that
will work best for you.
Very truly yours,
