Category: Business Tax Planning
Posted: December 2017
Tax reform creates uncertainty for many as the end of 2017 approaches. Using some of these planning techniques can help businesses reduce their tax burdens.
Defer income. Businesses that use cash accounting can defer income to 2018 by delaying end-of-year invoices. Those that use the accrual method can postpone delivery of goods or services until the beginning of the next year.
Purchase new equipment. Businesses can elect to expense (deduct immediately) the entire cost of most equipment up to a maximum of $510,000 for the first $2,030,000 of property placed in service by December 31, 2017. Keep in mind that the Section 179 deduction cannot exceed net taxable business income. The deduction is phased out dollar for dollar on amounts exceeding the $2.03 million threshold and eliminated above amounts exceeding $2.5 million. If your business cannot use Section 179 expensing because of income limitations, bonus depreciation can be used to depreciate 50% of the cost of new equipment placed in service in 2017. This rate will be reduced to 40% in 2018.
Use the business energy investment credit. Business energy investment credits are still available for eligible systems placed in service on or before December 31, 2021. Businesses that want to take advantage can still do so. Business energy credits include geothermal electric, large wind (expires in 2019), and solar energy systems used to generate electricity, to heat or cool (or to provide hot water for use in) a structure, or to provide solar process heat. Hybrid solar lighting systems are eligible, though passive solar and solar pool-heating systems are not.
Repair regulations. Where possible, year-end repairs and expenses should be deducted immediately, rather than capitalized and depreciated. Most small businesses are able to take advantage of de minimis safe harbor by electing to deduct smaller purchases ($2,500 or less per purchase or per invoice). Small businesses with gross receipts of $10 million or less can also use the safe harbor for repairs, maintenance, and improvements to eligible buildings.
Review partnership or S Corporation basis. Partners or S corporation shareholders are limited in the deduction of losses from these entities. These individuals must have “basis” in the entity that has generated the loss. Options for increasing basis include lending money to the entity or making a capital contribution. It is important to consider, however, that good tax decisions do not always equal good business. Continued losses may mean further risk to the investment.
Qualify for the Section 199 deduction. Businesses with manufacturing activities could qualify for a Section 199 domestic production activities deduction. Under current law, qualifying businesses can claim the Section 199 deduction based on 9% of their qualified production activities income (QPAI). The deduction is also limited to 50% of W2 wages paid by the taxpayer that are allocable to domestic production gross receipts. By accelerating salaries or bonuses attributable to domestic production gross receipts in the last quarter of 2017, businesses can increase the deduction amount.
Try the research and experimentation credit. If your business is eligible for the R&E credit, you may use this against payroll tax liability of up to $250,000 per year for five tax years. This provision can be used beginning in the fifth year of a new company’s existence.
Adopt efficient family tax strategies Parents who own businesses may realize some tax benefits by employing their children. Unincorporated businesses do not pay FICA taxes for children under age 18. The child could also be eligible for retirement benefits or contribute to an IRA or Roth IRA.
Please contact our office for advice on which of these suggestions might be best for your situation.
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