With the specter of Tax Reform looming, year end tax planning is especially important. The tax legislation that is winding its way through Congress includes significant tax relief for businesses. If Tax Reform comes to fruition resulting in lower tax rates for businesses in 2018, it might make sense to reduce taxable income this year that would be subject to the higher tax rates of current law. We won’t know precisely how Tax Reform will impact businesses until Congress reconciles the House and Senate plans, but we can offer some year-end tax planning “food for thought.”
Deferring Income: Deferring income into 2018 would save taxes if tax rates are lower next year. Accrual basis taxpayers could defer shipping goods or performing services to January to defer income that is not recognized for tax purposes until the transaction is complete. Cash basis taxpayers can defer billings until January to postpone cash collection until next year. Installment sales could be used to defer payments and the tax bite to next year. For interest and dividend income, consider buying short-term instruments that mature next year (Treasuries and Bank CD’s, for instance).
Accelerating Deductions: Taking deductions in 2017 could reduce your taxable income this year when you may be subject to higher taxes than next year. For accrual basis taxpayers, analyze your accounts receivable to determine uncollectible accounts that may be deductible this year. Declare bonuses to employees by the end of 2017, that you will pay by March of 2018. These bonuses may be deductible for you in 2017, but not be taxed to your cash basis employees until 2018, when tax rates may be lower under Tax Reform. For cash basis taxpayers, pay all your business expenses before year-end. You can even use your credit card to pay them and deduct them this year rather than next year when you pay your credit card bill.
Section 179 Deductions: Qualifying equipment purchases can be deducted in full (rather than depreciated over multiple years) up to $510,000 in 2017.
Bonus Depreciation: For certain depreciable property 50% bonus depreciation is allowed in 2017 but falls to 40% in 2018 under current law.
Qualified Research and Development: Expenditures before the end of the year could provide a tax credit against alternative minimum tax liability and your employer’s portion of payroll taxes. Some of these benefits may go away under Tax Reform in 2018.
Qualified Hurricane Contributions: Contributions before the end of the year for Hurricane Harvey, Irma and Maria relief efforts are not subject to the general corporation 10% of income limitation on deductibility. Instead these qualifying contributions can be deducted up to 100% of taxable income.
Qualified Retirement Plans: It’s not too late to initiate a qualified retirement plan for employees and claim deductible contributions this year. In some cases, the contribution would not have to be paid until 2018, but still be deductible in 2017. 401K’s, profit sharing plans and pension plans provide a variety of tax deductible opportunities. For smaller businesses, these plans can provide generous tax benefits for owner-employees.
With Tax Reform in sight, seeking guidance from your tax professional could pay dividends.