Paying attention to timing is critical for leveraging tax benefits for your small business. Doing some year-end housekeeping can help you make the most of any tax breaks your business qualifies for.
2017 Tax Changes To Remember for Year-End Tax Planning
The 2017 Tax Cuts and Jobs Act (the “Trump Tax Cuts”) instituted a number of changes to the way small businesses handle taxes. These tax changes below could impact your business taxes, so it’s important to remember them at the end of the year:
Eligible businesses can claim a 20% deduction from net business income, subject to restrictions and limits Certain deductions for small business have been eliminated, including the deduction for entertainment expenses If you have bought or plan to buy large capital items like vehicles, machinery, or equipment, higher first-year depreciation limits could save you money
Stock Up and Pre-Pay Expenses
Claiming a deduction for eligible business expenses can save money, as deductions reduce your taxable income for the year. If you have any cash sitting around, or you can reasonably use your credit line or a business credit card for purchases, stocking up on supplies or pre-paying certain expenses could give you a larger deduction:
Replenish office supplies or any supplies you use regularlyStock up on inventory, especially if you’re able to find it at a discountPre-pay insurance coverage for the next yearIf you use subscription services, switch from a monthly to yearly payment
Set Up a 401(k) Plan for Employees
Setting up a 401(k) for yourself and your employees is another way to save on business taxes. You can claim a tax credit for your business for the cost of setting up and administering a 401(k) plan, up to $500 a year for each of the first three years the plan is in existence. Even if you have a sole proprietorship, you can still use a solo 401(k) to set aside money for your retirement and save on business taxes. The potential tax savings could more than pay for the cost of setting up the plan and funding it. The Department of Labor suggests following these steps:
Adopt a written 401(k) plan documentArrange a trust for the plan’s assetsDevelop a recordkeeping system to keep track of contributionsProvide plan information to employees who are eligible to participate
Write Off Bad Business Debts
Bad (un-collectible) debts can be written off before the end of the year and the uncollected debts can be deducted from your taxable business income. The IRS also includes unpaid loans and business loan guarantees under the bad debt umbrella. To deduct bad debts, you must use the accrual accounting method:
Run an accounts receivable aging report to see which receivables are unpaid from customers or clients Make note of which debts you may still be able to collect on and which ones have a high certainty of remaining unpaid Add up all bad debts you want to write off and review the list with your tax advisor
Just know that if you receive the money from the customer later, you will have to reverse the write-off and declare the payment as income.
Write Off or Write Down Obsolete Equipment and Inventory
Obsolete, damaged, or worthless equipment can be taken off your accounting records to increase your expenses and lower your tax liability. You can write it down, meaning you reduce its value for tax purposes, or write it off, in which case its value drops to zero:
Review your business inventory and equipmentMark items that are obsolete, worthless, damaged beyond repair, or damaged but still usableList the full value of the items that are obsolete or worthless for write-offList the reduction in value for items that are damaged but still usable for write-downClaim the total expense for write-offs and write-downs as a deduction when you file your tax return
For example, if you have a computer that you purchased for $2,000 and it’s sitting in a back room because it no longer turns on and you bought a new computer, you can expense the full $2,000 purchase price because the computer is obsolete. If a piece of equipment costs $1,000 new and you feel its value is $300 less because of damage, you can list $300 as an expense, reducing the book value to $700.
Give Employees Bonuses or Gifts
In addition to receiving a tax deduction for paying bonuses or gifts to your employees, you may also receive much goodwill from employees, especially around the holidays. Bonuses to employees of all types of companies are deductible business expenses if they’re considered additional pay for services, not gifts. But, bonuses to sole proprietors, partners, and limited liability company (LLCs) members are not deductible, because the owners/partners/members are considered by the IRS to be self-employed.
Claim Bonus Depreciation and Section 179 Deductions
Changes to the tax code allow for accelerating depreciation on certain types of business equipment. In simpler terms, these provisions allow you to expense more of the value of business equipment purchased this year, for a larger tax deduction.
Bonus Depreciation
Bonus depreciation allows businesses to depreciate up to 100% of the adjusted basis of certain qualified property during the year that the property is placed in service, if that property is placed in service between Sept. 27, 2017, and before Jan. 1, 2023. You should be aware that some states modify or deny bonus depreciation. Check with your state department of revenue to see what the provisions are in your state.
Section 179 Depreciation
Section 179 allows taxpayers to deduct the cost of certain property as an expense when the property is placed into service. That includes machinery, equipment, and qualified real property. The current maximum deduction is $1.08 million, with a phaseout limit of $2.7 million.
Purchase Energy-Efficient Vehicles and Property
If it’s in your budget to upgrade vehicles or property, you could see a decent tax break at year’s end.
Energy-Efficient Property
The 179D deduction allows businesses to claim a tax benefit for energy-efficient improvements made to commercial properties. The tax deduction is $1.88 per square foot for owners of new or existing buildings who install energy-efficient lighting, heating, cooling, ventilation, and hot water systems. Building envelopes are also eligible for the deduction.
Alternative Motor Vehicles and Hybrids
Section 30D of the Internal Revenue Code provides a credit for the purchase of alternative motor vehicles and hybrid cars, including plug-in electric vehicles. You must be the original purchaser of this vehicle. The total tax credit is capped at $7,500 per vehicle.
Time Your Income and Deductions
One final year-end tax tip for small businesses revolves around deciding when to time the receipt of income and when to pay expenses. Getting the timing right matters for maximizing tax savings.
Deferring Income
As you get to the end of your business tax year, you may have the option of taking income in this year or next year. If you can take income in the year of the lower profit, you may be able to minimize your taxes. For example, if this year you will have a loss, but you know you will have a profit next year, you may want to encourage customers to pay you this year when your profits will be lower. If you think your profit will be lower next year, try to move payments from customers into next year. This is tricky, since you don’t really know what will happen next year, but it is worth a discussion with your tax advisor.
Timing Deductions
When considering whether to take a deduction for an expense this year or next year, here are three points to take into account:
Take the deduction in the year when your profit is higher: This will result in lower profits in that year.Take the deduction in the year when the deduction amount is higher: Some deductions change from year to year. Learning about these changes can save you money by allowing you to take the deduction when it is higher.Take the deduction in the year when the tax rates are higher: If you know that business tax rates will increase next year, take the deductions next year to minimize your taxable income in that year.
The principle of timing income and expense deductions, if done thoughtfully and with the assistance of your tax advisor, could lower your business taxes.
