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 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.
The majority of American taxpayers typically receive a refund from their federal tax returns, and in 2019 those refunds could increase by 26 percent, which is higher than previous years.
The jump in expected refunds is most likely a result of the recent tax overhaul that cut personal income tax rates so that workers can keep more of their income. Theoretically, such a change in taxes should prompt American workers to adjust their withholding rates accordingly through a Form W-4 with their employer. However, research shows that roughly 75 percent of tax payers, who historically over withhold from their paychecks anyway, only partially adjust those rates when new tax laws are introduced, or they don’t adjust them at all. This means that even more taxes are withheld from their paychecks than necessary, which results in a heftier refund.
The prospect of a bigger tax refund is enticing, and tax refunds are typically used to boost savings, pay down debt, and pay for vacations. But for those Americans who fall within the 75 percent of workers living paycheck to paycheck with little to no money in savings, over withholding is probably not the best move.
If Americans withhold more than necessary from their paychecks, they have less funds to apply to everyday expenses, financial goals, and life emergencies that pop up. If you are someone who might be over withholding and could benefit from an increase in your paycheck rather than waiting to see that money in your tax refund, see about submitting a new Form W-4 with your employer.
When you accept a new job with a new company, you need to decide what to do with the money in your 401(k) plan. Here are your options.
1. Leave the money in your former employer’s 401(k) plan
While this is typically an option, and your funds will continue to grow tax-deferred, it may not be the best option. For starters, once you move to your new place of employment, you’re no longer able to contribute to it. Another possible deterrent is the fact that your former employer could switch 401(k) providers or get bought out by a different company. Both scenarios would potentially leave you in the dark in regards to your account number or login information. However, if your new employer requires employees to work a certain length of time at the company before permitting them to partake in the 401(k) plan, leaving your 401(k) funds with your former employer temporarily might be a good game plan.
2. Roll your 401(k) to your new employer’s plan
If your new employer allows rollovers, you can have your 401(k) funds directly transferred to your new employer’s plan. This is called a “trustee-to-trustee” transfer: assets from one trustee or custodian of a retirement savings plan are transferred to the trustee or custodian of another retirement savings plan. By having your 401(k) funds directly transferred following federal rollover rules, you’ll avoid having federal income tax withheld, and your money will be easier to manage in one account. You can also have the funds transferred to a new or existing IRA.
3. Transfer your plan via an indirect rollover
Another possible alternative is to roll the funds over to another employer-sponsored retirement plan by having your 401(k) distribution check made out to you, and then depositing the funds to a new retirement savings plan. However, this particular move will require that 20 percent of the taxable portion of your distribution is withheld for federal income taxes. And if you wait beyond 60 days to redeposit the funds, the full amount of your distribution will be taxable.
Whichever way you choose to move forward with your 401(k) plan, you should be aware of rollover fees. Typically the fee is only a minimal one-time fee, but it’s worth checking in with your 401(k) provider to discuss this as well as any other questions you might have.
Although it might be difficult to imagine not claiming a tax refund, the IRS has estimated that nearly 1 million Americans have not claimed tax refunds from the 2014 tax year (filed in 2015), refunds that total over $1 billion. The IRS is also reminding taxpayers that they have until this year’s official tax day (April 17) to file those returns and receive their refund. The average refund owed from the 2014 tax year is $847 and taxpayers have three years from when they are supposed to file to claim a refund. After that time, the funds are considered property of the U.S. Treasury.
If you are owed a refund, there is no penalty for filing late, however, you must also have filed (or currently file) for your 2015 and 2016 returns. Refunds from 2014 will first be applied toward any money owed to the IRS or a state tax agency, and can also be used toward past due federal debts such as unpaid child support or student loans. Failing to file a return for 2014 could cost some taxpayers more than just an $850 refund; low or moderate income workers could be eligible for the Earned Income Tax Credit (EITC), which was worth as much as $6,143 in 2014.
So why did so many Americans fail to claim their refunds?
- As mentioned, many taxpayers fail to apply for the EITC. To qualify, your income must have been below $46,997 (or below $52,427 if married filing jointly) and you claimed three or more qualifying children; $43,756 for those with two qualifying children ($49,186 married filing jointly); $38,511 for taxpayers with one qualifying child ($43,941 married filing jointly); and $14,590 for people with no qualifying children ($20,020 married filing jointly).
- If you make under a certain amount annually, you do not have to file taxes. In 2014, single Americans over the age of 65 who earned less than $11,500, singles under 65 who earned $10,000 or less, or those married filing jointly who made less than $20,000 did not have to file. However, even though they did not have to file does not mean taxes were not taken out of their paychecks, which means those taxpayers could be owed a refund. Those who made estimated tax payments that year could also have overpaid in taxes, earning them a refund.
- Many students or their parents fail to claim the American Opportunity Education Credit, which allows education-related expenses such as course books, room and board, tuition and other education supplies and equipment to be deducted. In 2014, the credit maxed out at $2,500.
- Some individuals move and do not update their addresses correctly, which means refund checks and sent back to the IRS and left unclaimed. Other individuals simply forget.
How can I claim my money?
If you did not file for the 2014 tax year, and you think you may be owed a refund, the IRS suggests that you find applicable tax documents such as your W-2, 1098, 1099 or 5498 for the 2014, 2015 and 2016 tax years. If you are unable to find these forms or get them from your employer, act quickly and request a wage and income transcript from the IRS on their website or by phone at 800-908-9946, as transcripts can take between 5-10 days to be received in the mail.