Here’s a comprehensive summary of tax tips for tax year 2018 and tax reform for your business and individual clients.
Year-End Tax Tips for Businesses
Ramped-Up Depreciation Benefits
Business owners are now allowed to fully write-off the entire cost of new purchases (100 percent bonus depreciation) on computers, furniture and equipment in lieu of depreciating the cost of the asset over a number of years.
- In prior years, clients could deduct only 50 percent of the cost in year one.
- Another huge bonus is that used property now qualifies.
- Planning tip: There are circumstances where bonus depreciation cannot be used, such as with the self-employment tax and net operating losses, so be careful.
Under a companion measure, the government doubled the popular Section 179 tax break from $500,000 to $1 million, which represents the amount of assets that can be deducted in the first year.
- Business property qualifying for this deduction has been expanded to now to include fire protection, alarm systems and security systems.
- Planning tip: Section 179 may be preferable to bonus depreciation because clients can pick and choose the assets and amounts vs. the all-or-nothing approach required of bonus depreciation.
Small businesses that place passenger vehicles in service will see an increase in the maximum allowable depreciation expense.
- The auto limitation increased from about $13,000 in the first four years to over $40,000 in the first four years (the amounts are greater if they choose bonus depreciation). Sports utility vehicles carry a $25,000 limitation.
- Planning tip: These generous depreciation deductions allow the small business owner to increase their deductions and thereby reduce their taxable income, self-employment income and tax liability. So, consider asset purchases before year end.
It’s always a good idea to plan for retirement, especially with nice government incentives. There are a variety of retirement plans available to small businesses that allow the employer and employee a tax-favored way to save for retirement.
- Contributions made by owners for themselves and for employees can be deducted. Furthermore, the earnings on the contributions grow tax free until the money is distributed from the plan.
- The small business owner is also allowed a tax credit equal to 50 percent of the first $1,000 incurred in starting up a plan.
- Tax planning strategy: Small businesses are sometimes reluctant to save for retirement because there is not enough cash flow. The rules allow them to wait until after year end to contribute. These deductions serve to reduce taxable income and tax liability.
Tax Reform for Businesses
New 20 percent deduction for self-employed workers and small business owners
- One of the key tax reform measures provides a 20 percent deduction beginning in tax year 2018 on pass-through income from sole proprietors (Schedule C on Form 1040), limited liability companies, partnerships and S corporations.
- Small businesses qualifying for the 20 percent tax deduction could see their effective marginal tax rate reduced to 29.6 percent. For example, a single Uber driver, without kids, earning $26,000, will see about $623 tax savings in 2018 due to the 20 percent deduction from qualified business income and this further lowers their tax rate.
- There are some comprehensive rules surrounding this deduction, including a phase-out of the deduction for high-income earners (over $157,500 for single filers and $315,000 for joint filers). The rules surrounding this new provision opens the door for some planning techniques to optimize the deduction and reduce taxable income/tax liability.
Corporate Tax Rate
- Under the new law, in 2018, the tax rate for C corporations has dropped from 35 percent (top marginal rate) to 21 percent (flat tax). To simplify even more, Congress repealed the corporate alternative minimum tax.
- Reducing the corporate rate to 21 percent and the new 20 percent deduction for flow-through entities opens the door for a lot of tax planning. Tax professionals and small business clients will need to sit down and determine the best entity type.
- In addition to crunching the numbers, be sure to consider the legal and administrative factors.
- Tax reform disallows the 50 percent deduction for entertainment, amusement or recreation that are directly related to the business, except for the benefit of employees, such as office parties. Thus, the bar on deductions applies to the cost of tickets to sporting events, stadium license fees, private boxes at sporting events, theater tickets and golf club dues.
- Business meals with clients and potential customers are still deductible at 50 percent.
- Food and beverages provided during an entertainment event are not considered entertainment if purchased separately from event or the cost is stated separately on a receipt.
Brand New Credit: Employer-Paid Family and Medical Leave
- One nice new perk for businesses and their employees allows business owners to now claim a credit for wages paid to employees on family and medical leave.
- It starts at 12.5 percent for payments of 50 percent salary, and goes up to 25 percent if the leave payment rate is 100 percent of the normal rate.
- The maximum leave allowed for any employee is 12 weeks per year.
- Planning tip: You need to have a written policy that provides at least two weeks of paid leave.
Year-End Tax Tips for Individuals
Even if your clients didn’t owe money in the last tax season, it’s more important than ever to start planning now for the upcoming tax season due to tax reform. With reduced tax rates due to tax reform, clients may be seeing more money in their paychecks. Here are tips to help maximize their refunds.
Maxing Out Retirement
- Individuals have until Dec. 31 to max out their 401(k) to $18,500 ($24,500 50 and over) and reduce their taxable income.
- The self-employed you can contribute up to $55,000 into a SEP IRA for 2018.
- They have until the tax filing deadline to contribute up to $5,500 to their IRA ($6,500 for age 50 and over) and get a tax deduction for the contribution.
- They may even get a Saver’s Credit up to $1,000 ($2,000 married filing jointly) for contributing to retirement.
Donating Appreciated Stock
- Clients can supercharge the tax benefits of their generosity by donating appreciated stock or property rather than cash.
- If they’ve owned the asset for more than one year, they get a double tax benefit from the donation: They can deduct the property’s market value on the date of the gift and avoid paying capital gains tax on the built-up appreciation.
- They must have a receipt to back up any contribution, regardless of the amount for a stock transaction.
Paying for College Courses in Advance
- If some clients have been putting off that class to boost their career, they can pay for college courses for the first quarter of next year by Dec. 31 and may be able to get the Lifetime Learning Credit of up to $2,000 per return.
- If clients have a college student, they also may be able to pay for first quarter 2019 college courses by Dec. 31 and may be able to get the American Opportunity Tax Credit up to $2,500 for the first four years of college.
- In addition, don’t forget about the student loan interest deduction of up to $2,500 if they are paying on student loans.
Selling Loser Investments to Offset Gains
- A key year-end strategy is called “loss harvesting” – selling investments such as stocks and mutual funds to realize losses. Clients can then use those losses to offset any taxable gains they realized during the year because losses offset gains dollar for dollar.
- If losses are more than gains, they can use up to $3,000 of excess loss to wipe out other income. If they have more than $3,000 in excess loss, it can be carried over to the next year.
Defer Individual Income
- It’s tough for employees to postpone wage and salary income, but some clients may be able to defer a year-end bonus into next year, as long as it is standard practice in their company to pay year-end bonuses the following year.
- If clients are self-employed or do freelance or consulting work, they have more leeway. Delaying billings until late December, for example, can ensure they won’t receive payment until the next year.
- Of course, it only makes sense to defer income if clients think they will be in the same or a lower tax bracket next year. They don’t want to be hit with a bigger tax bill next year if additional income could push them into a higher tax bracket. If that’s likely, they may want to accelerate income into 2018 so they can pay tax on it in a lower bracket sooner, rather than in a higher bracket, later.
Watch Flexible Spending Accounts
Flexible spending accounts are fringe benefits many companies offer that let employees steer part of their pay into a special account, which can then be tapped to pay child care or medical bills.
The advantage is that money that goes into the account avoids income and Social Security taxes; the catch is the notorious “use it or lose it” rule. Clients need to decide at the beginning of the year how much to contribute to the plan, and if they don’t use it all by the end of the year, they may forfeit the excess.
With year-end approaching, check to see if your clients’ employers have adopted a grace period permitted by the IRS, allowing employees to spend 2018 set-aside money as late as March 15, 2019. If not, they can do what employees have always done and make a last-minute trip to the drug store, dentist or optometrist to use up the funds in their account.
Tax Reform for Individuals
Tips for your individual clients if they were once able to itemize deductions before tax reform:
- With the almost doubling of the standard deduction ($12,000 if single and $24,000 married filing jointly) under the new law, taxpayers who once itemized and were also able to take additional itemized deductions, such as charitable contributions, may now have to take the standard deduction, but if tax deductions are right at $12,000 single and $24,000 for married filing jointly, they can make smart moves before the end of the year.
- Donate more to charity to push them over the new standard deduction amount and maximize deductions.
- Use Donor-Advised Funds for charitable donations. An alternative to bunching donations, they can set up these funds and recommend how to distribute money from the fund to their favorite charity.
- Bunch itemized deductions. Watch deductible expenses such as medical expenses that are deductible at expenses over 7.5 percent of adjusted gross income for 2018. If medical expenses are getting close to the threshold. but not quite there, they may want to make those doctor visits they’ve been putting off.
Tips if individual clients once claimed deductions that were eliminated:
- Moving expenses: Expenses paid for moving for a job were tax deductible, but under the new tax law, it is no longer tax deductible unless they are active duty military. Clients can negotiate a moving reimbursement with an employer; remember, too, that they can deduct mortgage interest and property taxes (property taxes, state income, and state and local sales tax capped at $10,000 in aggregate).
- Dependent exemption: The dependent exemption of $4,050 is eliminated, but don’t forget that clients can send their kids to camp over the holidays if they have to work, and get a Child and Dependent Care Credit up to $1,050 for one child and up to $2,100 for two or more kids. Also, don’t forget that the Child Tax Credit doubled and is now $2,000 per dependent under 17.
- Unreimbursed employee expenses such as classes: Miscellaneous itemized deductions such as unreimbursed employee expenses for classes were eliminated, but clients can still take advantage of education tax credits, including the American Opportunity Tax Credit up to $2,500 or the Lifetime Learning Credit up to $2,000.