With the learning curve of the first tax filing season in the TCJA era behind us, year-end tax planning is a perfect time to incorporate those lessons learned. Here is a general overview of some steps business owners can take in their year-end tax planning.
If your business has acquired a fixed asset or property (one that you don’t intend to sell for at least one year and will be used to earn long-term income), and it’s placed in service before the end of the year, you can typically write off the cost in 2019. Thanks to changes made by the TCJA, this now applies to both new and used assets. The TCJA boosted the deduction limit to $1.02 million with a phase-out threshold of $2.55 million for 2019. It also increased bonus depreciation to 100% for property placed in service after September 27, 2017 and before January 1, 2023.
The IRS recently clarified that food and beverage costs are deductible by 50% in certain circumstances and when those costs are stated separately from entertainment on invoices or receipts.
One of the most significant changes made by the TCJA affects owners of pass-through entities (partnerships, S corporations, and LLCs) as it authorized a deduction of up to 20% of the owner’s qualified business income (QBI) for the tax years 2018 through 2025. The QBI deduction is reduced for some taxpayers based on the amount of their income, so some individuals may need to consider reducing their taxable income so it falls under the $157,500 threshold ($315,000 for married filing jointly), whether by making contributions to retirement plans or health savings accounts, or even through charitable contributions. Something to keep in mind is that specified service business owners, which includes most personal-service providers, are not eligible for the deduction if their taxable income is above a certain threshold.
It isn’t a bad idea to complete minor repairs by the end of the year because the deductions can offset taxable business income. However, costs of improvements to business property must be written off over time. If you’re unsure whether a specific renovation or upgrade falls under a repair or an improvement, the IRS recently issued regulations that clarify the distinctions.
Estimated Tax Payments
If your corporation is anticipating a small net operating loss for 2019 but a substantial net income in 2020, you might think about accelerating just enough of the corporation’s 2020 income to create a small amount of net income for 2019. You could also choose to defer some 2019 deductions. This way, rather than having to pay estimated taxes based on 100% of your 2020 taxable income, you will be able to base your estimated tax installments on the comparatively small amount of income shown on your 2019 return.
With additional guidance and regulations released consistently since President Trump signed the Tax Cuts and Jobs Act of 2017 into law, one thing remains clear: strategic tax planning is key to lowering a business’s total tax liability. Read on for some moves on lowering your 2019 business tax bill.
Establish Tax-Favored Retirement Plan
Current tax rules allow for significant deductible contributions, so if your business doesn’t already have a retirement plan in place, it’s worth considering. Small business retirement plan options include 401(k), SEP-IRA, SIMPLE-IRA, and the defined benefit pension plan. Some of these plans can be established up until December 31 and allow for a deductible contribution for the 2019 tax year, except for the SEP-IRA and SIMPLE-IRA, which mandate a set-up deadline of October in order to make a contribution for the same year.
Review Your Reports
The end of the year is typically a time for businesses to begin goal setting for the next year, so it’s crucial to have a firm grasp on how your business performed financially this year. Make sure your books are up to date and accurate so you have a clear picture before diving into next year’s plan.
Defer Income If It Makes Sense
Depending on where your income level is, you can potentially cut your tax bill by postponing any end-of-the-year income until January 1 or later. Ask your accountant if shifting receivable income to the new year makes sense for your business.
Purchase Business Essentials to Take Advantage of Deductions
Upgrade equipment and furniture, stock up on office supplies, take care of repairs, and make vendor payments in advance in order to maximize deductions. And thanks to the TCJA, you can claim 100% bonus depreciation for qualified asset additions that were acquired and put in place in 2019.
Make Charitable Contributions
Tis the season for giving…and claiming a deduction for the fair market value of your donations. In addition to money, think outside the box and contact a program that sponsors families for the holidays. They often need food, bedding, toys, cookware, and clothing. It’s a great way for employees to feel like they’re making a difference too. Just don’t forget to get the necessary documentation and receipts to keep with your records.
Start Preparing for Next Year
If you put these tips into action, you’ll be better prepared at this time next year. For instance, you’ll already have a retirement plan in place. By going through the process of tax preparation this year, you have the opportunity to create systems for organization that will expedite the process next year.
As a small business owner, the more you can stay organized, improve daily operations, control business expenses, and generally make life as an entrepreneur run a little more smoothly, the more proficient and prolific your business will become. Below are some top-rated apps and programs available to help you manage your business’s financial situation.
Though it’s intended mainly for individual users, this financial tracking app is effective for businesses too. Aside from tracking bills and cash flow, Mint also has Quicken MyBusiness, a tool for small businesses that helps categorize expenses, and gives you up-front information for tax filing.
With the ability to connect to your bank account, PayPal, Square, credit cards, and more, you can use QuickBooks to track sales and expenses, view financial statements, pay employees and vendors, track unpaid invoices, maximize tax deductions, and more. With QuickBooks Online, you can access QuickBooks on both iOS and Android phones and tablets.
For businesses and freelancers alike, cloud-based FreshBooks helps you create personalized invoices, with an option to automatically bill clients for recurring invoices, and generate customizable business reports, such as profit and loss statements. You can also automate tasks like organizing expenses and receipts, tracking your time, and following up with clients.
Created for businesses with nine or fewer employees, Wave is an accounting software platform that has the ability to track sales and expenses; manage invoices, customer payments, and payroll; scan receipts; and generate accounting reports. With Wave’s free apps for iOS and Android, you can send invoices on the go, and get notified when an invoice is viewed, becomes due, or gets paid. Also available through the platform is a free personal finance software to help small-business owners manage their finances in one place.
Once you connect your accounts to the Truebill app, it will generate a report of where your money is going, categorizing and charting subscriptions and expenses. An added bonus with Truebill is a feature that compares your bills and subscriptions to average service levels, and with your initiation, will call providers and negotiate on your behalf.
Intended for small and mid-sized businesses, this accounting app (accessible by both desktop and mobile platforms) can handle payments and expenses, asset management, bank account reconciliation, invoicing and purchase orders, sales tax calculations, and multi-currency accounting.
If you’re looking for a forecasting program to help with strategic planning and analysis, PlanGuru might be a good fit. It’s pricey, with business plans starting at $99 per month, but with an analytics dashboard, Excel add-on, a budget and forecasting platform, and training, it might be worth the cost to keep business spending in check.
This simple expense tracker uses multiple platforms to keep tabs on expenses and mileage by reading and importing expenses from linked bank accounts and credit cards. And with the ability to scan and upload receipts, expenses can easily be submitted to employers.
This bookkeeping service halts the need to invest in big bookkeepers and implements tax services for small businesses. It also helps with forecasting by syncing with bank accounts and credit cards to predict future cash flow determined by current trends and previous expenses.
Most small businesses have limited financial resources, so managing funds wisely and intentionally is crucial to the success of the business. Below are ways in which your small business may be throwing away money that could be needed elsewhere.
Having Overheads that Exceed Profit
It might be common sense, but if you’re not making enough profit to cover your expenses, trouble is on the horizon. Even entrepreneurs can be financially-challenged, so it might be worth it to enlist the help of an accounting professional. Additionally, you should identify the most profitable aspects of your business as well as the ones that are draining resources, and make adjustments however needed.
Consider whether your full-time staff is absolutely needed. Could some positions be just as effective in part-time, seasonal, or freelance roles? Too, make sure you’re tapping into your employees’ full potentials. Get to know their interests and individual areas of expertise in order to increase productivity, propel your business forward, and offer new ways to motivate employees to take a vested interest in the success of your business.
Advertising and Marketing Expenses
As a small business owner, you likely don’t have money to waste on untargeted marketing or costly advertising campaigns. Your best bet is probably content marketing, a.k.a. blogging on your website. Brush up on SEO – or tap into the unidentified skills of your employees – to make sure your posts are keyword-optimized and pop up in search engines. Not a writer? Again, tap into the skillset of your employees, or hire a freelance writer. Lastly, think about finding someone to manage your company’s social media accounts and Google ad campaigns.
Trade Shows and Conferences
Though they’re a great way to network while promoting your products or services, they’re often expensive. When funds are tight it’s wise to be choosy about which ones you attend. If one or two specific trade shows or conferences have proven to produce sales and benefit business, just concentrate on having a presence at those venues and forgo the ones that might not be worth the cost.
The Latest Technology
In most instances you really don’t need the latest and greatest that technology has to offer. For example, if you buy a sophisticated software program that requires outsourced labor at a significant cost just to maintain simple records, you might want to rethink whether such a costly program is worth it. Cloud-based services are available to small businesses at low to no cost.
Weak Expense Tracking
If your love as an entrepreneur is building new products, or networking and finding new clients, tracking expenses is likely something that falls on the back burner. Finding a detail-oriented and trustworthy employee to handle this task will benefit your company’s bottom line – and free you up to focus on your strengths. And on your employees’ end, if they know someone is keeping tabs on their spending, they’re likely to be more frugal with company expenses.
Credit Cards and Insurance
Routinely keeping credit card balances in check might seem like a menial housekeeping task, but with interest rates almost always greater than 20 percent, failing to pay your credit cards in full each month is a costly mistake for a small business. Likewise, be sure you’re getting the lowest possible insurance rate for your company to avoid excessive costs. You might also benefit from an independent insurance agent who can go to bat for you when you’re hit with a claim.
With the overwhelming amount of pressure and decisions to make when starting a small business, stress can cause even savvy industry gurus to fall for common startup mistakes. In the best scenarios, mistakes will set you back a bit, but in worst-case scenarios, they can hurt your potential and outlook for long-term success. Below are common startup mistakes that can have a negative impact on your small business.
Miscalculating Startup Costs
The perils of starting a business with an insufficient budget, or an underestimated one, can be a shot in the foot before you even get running. Plan to have at least six months’ worth of income in the bank before officially cutting the ribbon to open your business. This will give you some time to get up and going, garner some clients, and generate invoices and payment.
Neglecting to create a marketing strategy
Most new businesses are going to have to put some brain power and cash behind a good marketing plan, and this should be done well in advance of turning on the lights for customers and clients. These plans should include online, offline, social media, and any other means of marketing to get the word out. Will marketing and social media be outsourced, will you handle it personally, or will you bring someone on board to solely handle this task?
Failing to be frugal
Whether through a bank loan, a generous loan from a relative, sales of your own assets, or years of saving your own money, you’re going to have some capital to spend on rent, equipment, products, employees, etc. Keep in mind that profits won’t roll in overnight. Spend your savings wisely, do your research, and make your money stretch.
Thinking you can be a one-man operation
Even if you’re a one-man or one-woman business in the beginning, you’ll need people in your corner. You’ll inevitably want to shoot around ideas with someone; you may need someone, even on a very part-time basis, just to handle invoices and office files; you’ll want feedback, advice, and even potential contacts. Consider if it makes sense for your business to create a board of advisors.
The Internal Revenue Service (IRS) recently released a new document clarifying the new rules related to section 199A. If you’re unfamiliar with 199A, this section is a part of the tax code that references a new deduction of up to 20 percent of qualified domestic business income (QBI) for pass-through entities such as sole-proprietorships, partnerships, S-corporations, trusts, or estates. This section is extremely intricate, but the newly released regulations have cleared up many of the questions raised by the original legislation.
Like many of the other provisions of the Tax Cuts and Jobs Act (TCJA), the rules for 199A are effective for the tax year 2018. This particular deduction will go away unless further action is taken, expiring in 2025. This particular deduction allows business entities to take up to a 20% deduction of QBI. Qualifying for this particular deduction can be tricky as it is only for pass-through entities. Other information about your business (what kind of work you do, wages paid, etc.) may also preclude you from some or all of the deduction.
In order to be deemed a section 162 business that would qualify for the 199A deduction, you must be involved hands-on with the activity of your business on a consistent basis. Typically, if you think you’re running the business, you are most likely involved enough to be qualified. In regards to rental property, this gets a little more complicated. Under Revenue Procedure 2019-7, the IRS claims that rental property is a qualified business if 250 hours or more of rental services are provided for the year and separate books and records are kept for each rental. However, you can’t qualify and lose the deduction if you use the rental for yourself more than two weeks of the year. Matters get even more complicated when the IRS requires you to handle each business (even if operating under the same legal entity) separately with the ability to calculate a QBI for each individual business.
Furthermore, you must know the business owner’s taxable income. If the business owner’s income falls above the thresholds listed below, the next matter is determining whether the business is a specified service trade or business (SSTB).
Business Owner’s Income Thresholds
- 2018: $157,500 – $207,500
- 2019: $160,700 – $210,700
- 2018: $315,000 – $415,000
- 2019: $321,450 – $421,450
Many questions around the 199A deduction that remain unanswered. In the foreseeable future, the 199A deduction will require professional attention as we adapt to the new tax laws. According to the IRS, 95 percent of business owners fall below the threshold amounts and don’t need to worry about the limitations of the deduction. As always, it is crucial to work with tax professionals, such as MKR CPAs, to ensure that your business isn’t missing out on important deductions and properly filing for your business’ needs.