Year End Tax Planning For Your Business
By Nicole Modzelewski
One tax season after the passage of the Tax Cuts & Jobs Act (TCJA) we have now had a chance to examine its effects on tax liability. As the end of the year approaches, it is a good time to re-examine the changes created by the TCJA, get ready for 2019 tax filing, and take the opportunity to analyze the income and deductions of your company to see where you can make some changes to lower your liability.
One area to consider is bad debts. An accounts receivable aging report should be run at the end of the year to determine if there are any receivables that are outstanding for a long period of time. If there are any that you determine you will not be receiving the money for, now would be a good time to write these balances off as bad debts and take a deduction against income.
Inventory analysis can benefit you in two different ways. The first relates to writing off obsolete or damaged inventories. Second, under the TCJA, small business taxpayers are exempt from the inventory capitalization rules. To qualify, your average annual gross receipts over the last 3 years cannot exceed $25 million dollars. As a business, you will benefit by not having to capitalize costs into inventory under UNICAP and by expensing inventory when purchased. This translates into lower taxable income.
If you have been preparing your tax return under the accrual method of accounting and your average annual gross receipts over the last 3 years do not exceed $25 million, you should consider changing to the cash method of accounting. This will benefit you if your accounts receivables and prepaid expenses exceed your accounts payables and accrued expenses. By analyzing these accounts, you can determine if changing to the cash method of accounting will create a tax deduction. Whether you are on the cash or accrual method of accounting, you should consider accelerating expenses by purchasing any supplies that will be needed for 2020 by the end of 2019, and taking the deducting in 2019.
The TCJA also brought about the Qualified Business Income Deduction for flow-through entities. Now that we have seen how this deduction played out during the 2018 tax year, we can plan accordingly for 2019. The company should monitor the amount of wages paid so the maximum deduction available can be utilized.
Another tax planning strategy relates to capital asset expenditures and disposals. Before the end of 2019, you should determine if you have the means to invest in capital assets. Two ways you can benefit from investing in capital assets is through bonus depreciation and the Section 179 deduction. By investing in certain qualified property, you can take 100% bonus depreciation on these purchases or a deduction up front for Section 179 property. Please consult with your tax advisor regarding what the limitations and requirements are for each and which will benefit your company the most. You should also look at the fixed assets you have on hand and determine if there are any worthless or damaged assets that can no longer be used. If there are, these assets can be written off your balance sheet and a tax deduction can be taken for the net tax value of these assets.
Employee bonuses are also a great way to lower your taxable income and reduce your tax liability. The end of the year is a good time to pay bonuses to your employees, and these bonuses are deductible business expenses. This will not only benefit your bottom line but will also go a long way with your employees. If bonuses are accrued, they must be non-forfeitable if the employee leaves the company.
Lastly, there are tax credits for federal and state purposes that can be used against your tax liability. These vary by state, but exist in some form in most jurisdictions. For example, if your company has research and development expenses, you may be able to get both a Federal and a New Jersey research and development credit. The credit is based on qualifying wages, supplies, rental or lease costs of computers, and contract research expenses.
For New Jersey, there is also the Manufacturing Equipment and Employment Investment Tax Credit. This relates to investment in certain manufacturing equipment and encourages employers to employ New Jersey residents at their New Jersey locations.
New York also has some tax credits that could apply to your company. There is the Investment Tax Credit, which is for qualified property placed into service during the tax year. There is also the Manufacturer’s Real Property Tax Credit if you are a qualified New York manufacturer who paid real estate taxes for a property owned or rented by you and it is principally used during the tax year for manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing. There are various other credits that could apply to your business, therefore it is important to consult with your tax advisor to see what is available.
Please reach out to us to learn more about the particular credits available in the states that you do business.
As you can see, there are many things that you can consider as the 2019 year is coming to an end to help you maximize deductions and minimize your income. Each business has unique facts and circumstances, and some may be better than others depending on your circumstances. As such, please be sure to consult with your tax advisor.