2018 Year-End Tax Planning for Businesses
As 2018 draws to a close, there is still time to reduce your 2018 tax bill and plan ahead for 2019. This letter highlights several potential tax-saving opportunities for you to consider. I will arrange to meet with you to discuss specific planning opportunities and issues that you might have in mind.
Deferring Income into 2019
Deferring income to the next taxable year is a time-honored year-end planning tool. If you expect your taxable income to be higher in 2018 than in 2019, or if you operate as anything except a C corporation and you anticipate being in the same or a higher tax bracket in 2018 than in 2019, you may benefit by deferring income into 2019. With the passage of tax reform largely going into effect in 2018, new considerations may need to be made for the end of 2018. Of course, if an individual is subject to the alternative minimum tax, standard tax planning may not be warranted. Some ways to defer income include:
Use of Cash Method of Accounting: By adopting the cash method of accounting instead of the accrual method, you can generally put yourself in a better position for accelerating deductions and deferring income. There is still time to implement this planning idea, because an automatic change to the cash method can be made by the due date of the return including extensions. C corporations or partnerships with a C corporation partner with average annual gross receipts of $25 million or less for the prior three taxable years can make an automatic change to the cash method. Provided inventories are not a material income producing factor, sole proprietors, limited liability companies (LLCs), partnerships, and S corporations can change to the cash method of accounting without regard to their average annual gross receipts.
Installment Sales: Generally, a sale occurs when you transfer property. If a gain will be realized on the sale, income recognition will normally be deferred under the installment method until payments are received, so long as one payment is received in the year after the sale. So if you are expecting to sell property prior to the end of 2018, and it makes economic sense, consider selling the property and report the gain under the installment method to defer payments (and tax) until next year or later.
Delay Billing: If you are on the cash method, delay year-end billing to clients so that payments are not received until 2019.
Interest and Dividends: Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not includible in income until received. To defer interest income, consider buying short-term bonds or certificates that will not mature until next year. Unless you have constructive receipt of dividends before year-end, they will not be taxed to you in 2018. If you have control or influence over when dividends are paid to you, we should discuss this when we meet.
Accelerating Income into 2018
You may benefit from accelerating income into 2018. For example, in the case of non-C corporation taxpayers, you may anticipate being in a higher tax bracket in 2019, or perhaps you need additional income in 2018 to take advantage of an offsetting deduction or credit that will not be available to you in future tax years. Note, however, that accelerating income into 2018 could be disadvantageous if you expect to be in the same or lower tax bracket for 2019.
If you report your business income and expenses on a cash basis, issue bills and pursue collection before the end of 2018. Also, see if some of your clients or customers are willing to pay for January 2019 goods or services in advance. Any income received using these steps will shift income from 2019 to 2018.
Qualifying Dividends: Qualified dividends are subject to rates similar to the capital gains rates. Qualified dividend income is generally subject to a 15% or 20% rate dependent upon the new thresholds set by the 2017 tax act. The new thresholds are not tied to specific income tax brackets, but roughly speaking the 20% rate will apply to those in the 35% or 37% rate bracket, while the 15% rate applies to those at or above the 22% rate. Note that qualified dividends may be subject to an additional 3.8% net investment income tax. Qualified dividends are typically dividends from domestic and certain foreign corporations. The corporate board may consider the tax impact of declaring a dividend on its shareholders. If you are not in the highest capital gains bracket for 2018, but you expect to be in 2019, consideration should be made as to authorizing any dividend payment prior to the end of 2018 to utilize the 15% favorable tax rate vs. the 20% rate at higher income levels.
Accelerating Business Deductions
Bad Debts: If you use the accrual method, you can accelerate deductions into 2018 by analyzing your business accounts receivable and writing off those receivables that are totally or partially worthless. By identifying specific bad debts, you should be entitled to a deduction. You may be able to complete this process after year-end if the write-off is reflected in the 2018 year-end financial statements. For non-business bad debts (such as uncollectible loans), the debts must be wholly worthless to be deductible, and will probably only be deductible as a capital loss.
2018 Bonuses: In general, if you are paying a bonus to employees, you may accrue that liability and deduct that amount if all the events are satisfied that fix that liability even though you pay the bonus next year, and you do not have a unilateral right to cancel the bonus at any time prior to payment. Generally, you will accelerate the bonus deduction into 2018 while your employees will report the income in 2019 if they are cash method taxpayers. Furthermore, any compensation arrangement that defers payment will be currently deductible only if paid within 2.5 months after the employer's year-end.
Suspended Passive Losses: Generally, you may have passive losses that have been suspended and not yet allowed as a deduction. Let's discuss when we meet what might be done to identify and absorb or release the suspended losses as part of your overall tax planning.
Highlights of Tax Credits
Research and Development Tax Credit: Beginning in 2016, eligible small businesses ($50 million or less in gross receipts) may claim the research and development tax credit against alternative minimum tax liability (which no longer applies to C corporations due to the repeal of the corporate AMT by the 2017 tax act), and the credit can be used by certain qualified small businesses against the employer's payroll tax (i.e., FICA) liability.
Employer Wage Credit for Employees in the Military: Some employers continue to pay all or a portion of the wages of employees who are called to active military service. The amount of the credit is equal to 20% of the first $20,000 of differential wage payments to each employee for the taxable year. Beginning in 2016, employers of any size with a written plan for providing such differential wage payments are eligible for the credit.
Work Opportunity Credit: The work opportunity credit is an incentive provided to employers who hire individuals in groups whose members historically have had difficulty obtaining employment. The credit gives a business an expanded opportunity to employ new workers and to be eligible for a tax credit based on the wages paid. The credit is available for first-year wages paid or incurred for employees hired and who began work during certain years the credit was available. Employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more) will be entitled to an increased credit amount (i.e., 40% of the first $6,000 of wages) for new hires that begin to work for an employer on or after January 1, 2016 through December 31, 2019.
Qualified Small Business Stock
Exclusion of Gain Attributable to Certain Small Business Stock: Stock acquisitions that qualify as “small business stock” under § 1202 are subject to special exclusion rules upon their sale as long as a five-year holding period is satisfied. A 100% gain exclusion applies for qualified small business stock acquired after September 27, 2010 and held for more than five years. A 75% exclusion applies for qualified small business stock acquired after February 17, 2009, and before September 28, 2010 (and held for at least five years). A 50% exclusion applies for qualified small business stock acquired before February 18, 2009 (and held for at least five years).
General Business Considerations
Qualified Business Income Deduction: The 2017 tax act added a new deduction for individuals, trusts, and estates who are owners of non-C corporation businesses. The deduction is for qualified business income in addition to qualified publicly traded partnership income, qualified REIT dividends and income of, or received from, certain agricultural and horticultural cooperatives.
Excess Business Loss: Beginning in 2018 and until 2025, taxpayers other than C corporations are limited in their ability to deduct business loss. The excess business loss that is disallowed, is instead carried forward as part of the taxpayer's net operating loss in succeeding years.
Business Interest Deduction Limit: Beginning in 2018, the limitation on the deduction for business interest expense was substantially expanded. We should discuss these new rules when we meet to determine how these new changes will affect you in 2018.
Charitable Contributions: A charitable donation deduction is available to businesses, but the actual deductibility depends on the business form. A corporation is allowed a deduction of up to 10% of its taxable income; whereas, a pass-through entity is subject to an individual's limitations. Specific types of assets may also have limited deductibility, or may need to meet certain requirements. In addition, the substantiation and reporting regulations for charitable donations were recently updated. While most of the changes were relatively minor, qualified appraisals and qualified appraisers, must now meet particular requirements. Please contact me before making charitable donations, particularly inventory items, to ensure you meet the deduction requirements.
Equipment Purchases: If you purchase equipment, you may make a “§ 179 election,” which allows you to expense (i.e., currently deduct) otherwise depreciable business property, including computer software and qualified real property. Air conditioning and heating units placed in service during tax years beginning in or after 2016 are eligible for this deduction. You may elect to expense up to $1,000,000 in 2018 of equipment costs (with a phase-out for purchases in excess of $2,500,000 in 2018), and the deduction is subject to a business income limit.
In addition, careful timing of equipment purchases can result in favorable depreciation deductions in 2018. In general, under the “half-year convention,” you may deduct six months' worth of depreciation for equipment that is placed in service on or before the last day of the tax year. (If more than 40% of the cost of all personal property placed in service occurs during the last quarter of the year, however, a “mid-quarter convention” applies, which lowers your depreciation deduction.)
Bonus Depreciation: For property acquired and placed in service during the period beginning on September 27, 2017 and running through 2022 (with an additional year for certain property with a longer production period), the bonus depreciation percentage is 100%, with a phase down beginning in 2023 (2024 for longer production period property).
Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses, and their dependents as an above-the-line deduction, without regard to the general 7.5%-of-AGI floor. Self Employed Health Insurance includes eligible long term health care premiums.
Vehicles Weighing Over 6,000 Pounds: A popular strategy in recent years is to purchase a vehicle for business purposes that exceeds the depreciation limits set by statute (i.e., a vehicle rated over 6,000 pounds). Doing so would not subject the purchase to the statutory dollar limit for depreciation: $10,000 for 2018; $10,000 in the case of vans and trucks (if bonus depreciation is taken, the 2018 amounts increase to $18,000 for cars and $18,000 for vans and trucks). Therefore, the vehicle would qualify for the full equipment expensing dollar amount. However, for SUVs (rated between 6,000 and 14,000 pounds gross vehicle weight) the expensing amount is limited to $25,000. Note that for property acquired after September 27, 2017, the phase-down period to lower the increase in depreciation limits ($8,000 (2018) to $6,400 (2019)) when bonus depreciation is taken, was delayed until 2019. This means, to maximize the first-year depreciation it is best to put the vehicle in service in 2018 if you were contemplating this action in the next few months.
Capitalization of Tangible Property: Recent rules clarify whether certain items you purchase for use in your business (i.e. copiers, computers) can be expensed in the year purchased, or must be capitalized and deducted over several years. The rules include certain elections that may simplify your recordkeeping and/or increase your current deductions. We should discuss these rules when we meet.
Home Office Deduction: For self-employed individuals, expenses attributable to using the home office as a business office are deductible if the home office is used regularly and exclusively: (1) as a taxpayer's principal place of business for any trade or business; (2) as a place where patients, clients, or customers regularly meet or deal with the taxpayer in the normal course of business; or (3) in the case of a separate structure not attached to the residence, in connection with a trade or business. If you have been using part of your home as a business office, we should talk about the amount of any deduction you would like to take because an IRS safe harbor could be used to minimize audit risk.
NOL Carryforward Period : If your business suffers net operating losses for 2018, you generally are able to carry forward those losses against taxable income indefinitely. Carrybacks are generally disallowed with exceptions for farming and non-life insurance companies; which can be carried back two years. A corporation may file Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax , to recover any overpayment of estimated tax for the tax year over the final income tax liability expected for the tax year. If you are expecting a tax loss for the current year and have paid estimated taxes, we should discuss this process as to quickly recover your cash payments. For losses expected to be incurred on an individual return, the filing of Form 1045 Application for Tentative Refund may be applicable. Be aware that if a corporation has a loss in 2018 and income in 2019, it will have to make estimated tax payments for 2019.
Inventories Subnormal Goods: You should check for subnormal goods in your inventory. Subnormal goods are goods that are unsalable at normal prices or unusable in the normal way due to damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including second-hand goods taken in exchange. If your business has subnormal inventory as of the end of 2018, you can take a deduction for any write-downs associated with that inventory provided you offer it for sale within 30 days of your inventory date. The inventory does not have to be sold within the 30-day time frame.
Small Employer Pension Plan Startup Cost Credit: Certain small business employers that did not have a pension plan for the preceding three years may claim a nonrefundable income tax credit for expenses of establishing and administering a new retirement plan for employees. The credit applies to 50% of qualified administrative and retirement-education expenses for each of the first three plan years. However, the maximum credit is $500 per year.
Employer-Provided Child Care Credit: For 2018, employers may claim a credit of up to $150,000 for supporting employee child care or child care resource and referral services. The credit is allowed for a percentage of “qualified child care expenditures,” including for property to be used as part of a qualified child care facility, for operating costs of a qualified child care facility, and for resource and referral expenditures.
Health Care and Other Employee Benefit Planning
Pay or Play Excise Tax: For the 2018 plan year, if you have 50 or more full-time equivalent employees, you could be subject to an excise tax, which could be as much as $2,320 per full-time employee, for failure to offer a health care plan that is minimum essential coverage to at least 95% of your full-time employees if at least one employee obtains subsidized coverage through a public health insurance exchange. The first 30 workers are excluded from the penalty excise tax. If you do offer coverage but it is not adequate or is unaffordable, the excise tax could be $3,480 for each full-time employee who obtains subsidized coverage through an exchange. Smaller employers should review whether they have undergone, or will soon undergo, any changes to their business structure that would require them to be aggregated with other entities and subject them to potential liability. Larger employers should consider their health care plan options in light of this potential excise tax liability.
Health Care Reporting: Filings for 2018 Forms 1095-C and Form 1094-C, generally for employers with 50 or more full-time equivalent employees, and Forms 1095-B and Form 1094-B, for employers with self-insured plans and other providers of minimum essential coverage, are due specifically by February 28, 2019, if you are filing on paper, or by April 1, 2019, if you are filing electronically. Statements to employees are due by January 31, 2019. Extensions are available.
Health Reimbursement Arrangements: Certain small employers that want to assist their employees in obtaining health insurance may choose to set up a qualified small employer health reimbursement arrangement. The QSEHRA, unlike other health reimbursement arrangements, is a tax-favored arrangement that is not considered a group health plan and does not expose the employer to excise taxes for not satisfying Affordable Care Act requirements. It's available to employers that have fewer than 50 full-time equivalent employees, do not offer any health plan, and meet other requirements.
Credit for Employee Health Insurance Expenses of Small Employers: Some small employers that provide health coverage to their employees through a Small Business Health Options Program (SHOP) Exchange may be eligible to claim a credit if they pay for at least half of the premiums for health insurance coverage for their employees. Generally, employers with 10 or fewer full-time equivalent employees (FTEs) and an average annual per-employee wage of $26,600 or less are eligible for the full credit. In 2018, the credit amount begins to phase out for employers with either 11 FTEs or an average annual per-employee wage of more than $26,600. The credit is phased out completely for employers with 25 or more FTEs or an average annual per-employee wage of $53,200 or more. The credit is available on a sliding scale for up to 50% of the employer's contribution toward employee health insurance premiums. The credit is available only for two consecutive taxable years after 2013, so it is not available to you if you or a predecessor claimed it for 2016.
Tax Returns: For C corporations reporting on a calendar year, the 2018 filing deadline is on or before April 15th. For C corporations reporting on a fiscal year other than one ending June 30, the filing date is the 15th day of the fourth month following the close of the taxable year. For June 30 fiscal year C corporation filers, the filing deadline remains the 15th day of the third month following the close of the taxable year (September 15). Effective for returns for tax years beginning after December 31, 2016 and before January 1, 2026, there is generally an automatic six month extension for calendar year C corporations, and an automatic seven month extension for fiscal-year C corporations with a taxable year ending on June 30. For partnerships and S corporations reporting on a calendar year, the filing deadline is March 15th, and for partnerships and S corporations reporting on a fiscal year, the filing deadline is the 15th day of the third month following the close of the fiscal year.
FBAR: U.S. persons holding any financial interest in, or signature or other authority over, a foreign financial account exceeding $10,000 at any time in a calendar year must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Treasury Department. The due date for 2018 is the same as the U.S. tax filing deadline of April 15, 2019 (unless extended by a weekend or holiday), with an automatic six-month extension to October 15. Accordingly, specific requests for this extension are not required.
FATCA: The Foreign Account Tax Compliance Act (FATCA) requires reporting and possible withholding on payments made to foreign entities, whether the foreign payees are financial institutions or not. Your compliance processes need to be in place in advance of making any payments to foreign entities.
Uncertain Tax Positions: A corporation must file Schedule UTP to disclose certain uncertain tax positions with its income tax return if it: (1) files Form 1120, Form 1120-F, Form 1120-L, or Form 1120-PC; (2) has assets equal to or greater than $10,000,000; (3) issued (or a related party issued) audited financial statements reporting all or a portion of the corporation's operations for all or a portion of the corporation's tax year; and (4) has one or more tax positions that must be reported on Schedule UTP. A taxpayer that files a protective Form 1120, 1120-F, 1120-L, or 1120-PC and satisfies the conditions set forth above also must file Schedule UTP.
Electronic Funds Transfer: A corporation must make its deposits of income tax withholding, FICA, FUTA, and corporate income tax by electronic funds transfer (EFT), including through the IRS's Electronic Federal Tax Deposit System (EFTPS).
Estimated Tax Payments
A corporation (other than a large corporation) generally may be able to avoid any underpayment penalties by paying estimated taxes based on 100% of the tax shown on the prior year return. A large corporation is a corporation that had taxable income of $1 million or more for any of the three tax years immediately preceding the current year.
An individual taxpayer, operating a business as a sole proprietorship, may be able to avoid any underpayment penalties by paying estimated taxes based on 100% of the tax shown on the prior year return. However, if an individual's adjusted gross income as shown on the tax return for the preceding tax year exceeds $150,000 ($75,000 in the case of a married individual who files separately), the amount of the required installment is generally increased to 110% of the tax shown on the prior year's return. An income tax projection should be completed in order to determine the best option.
A corporation or an individual using the cash method of accounting may want to consider paying their fourth quarter state estimated taxes before December 31st, rather than in the first quarter of next year, if they are able to use a state income tax deduction for the current year. We would need to run an income tax projection to determine the best option.
If you have any questions, please do not hesitate to call. I will be calling to schedule a meeting with you at your convenience to discuss planning and the requirements outlined above. There is still time to implement these strategies to minimize your 2018 tax liability and plan for 2019.
GML Associates, P.C.