Year-end tax planning is not just limited to individuals. Thanks in great part to the new Tax Cuts and Jobs Act (TCJA), small businesses can get in on the action in 2018, too. Case in point: Following are five tax planning ideas that may benefit your small business after the TCJA.
- Section 179 deductions: Under Section 179 of the tax code, a business can currently deduct the cost of qualified property placed in service during the year, up to an annual limit. The TCJA effectively doubles the limit from $500,000 to $1 million and provides inflation indexing for future years. It also increases the threshold for phasing out the Section 179 deduction from $2 million to $2.5 million.
To maximize the deduction for 2018, buy property and place it in service before 2019. Note that the deduction cannot exceed the amount of your taxable business income.
- Bonus depreciation: In conjunction with Section 179, your business may claim “bonus depreciation” on qualified property placed in service in 2018. The TCJA doubles the previous 50% deduction to 100% through 2022. Afterwards, bonus depreciation is phased out, as follows:
- 80% in 2023;
- 60% in 2024;
- 40% in 2025;
- 20% in 2026; and
- 0% in 2027 and thereafter.
Furthermore, note that the TCJA expands the definition of qualified property to include used, as well as new, property.
- QBI deduction: Beginning in 2018, the TCJA creates a brand-new deduction for qualified business income (QBI) of pass-through entities like S corporations, partnerships and limited liability companies (LLCs) and sole proprietorships. The deduction is equal to up to 20% of QBI earned by a qualified taxpayer, but it is phased out for higher-income taxpayers. In addition, special rules further reduce the tax benefits for certain taxpayers in a “specified service trade or business” (SSTB).
- Business interest: Under the TCJA, the annual deduction for the net interest of a business is limited to 30% of its annual income. Key exception: The new 30% deduction limit does not apply to a qualified small business with average gross receipts of $25 or million or less for the three prior tax years.
Accordingly, you might be able to avoid the limit by deferring income into 2019, if this is otherwise sensible. Any excess interest for the year may be carried forward indefinitely until it is exhausted.
- Family and medical leave credit: Finally, the TCJA carves out a new tax credit for wages paid to employees while they are out on family or medical leave. To qualify, a business must offer at least two weeks of paid family or medical leave annually to full-time employees paid no more than $72,000 a year.
Generally, the family and medical leave credit is equal to 12.5% of wages if an employee is paid 50% of normal wages while on leave. The credit is gradually increased to a maximum of 25% for a payment of 100% of wages. Caveat: This credit expires after 2019. If your company is going to offer it, do it now.
Of course, this is just the tip of the iceberg. Contact your JMF professional tax advisers for more details about TCJA provisions affecting small businesses.