8 Year-End Tax Planning Tips for Business Owners
The Tax Cuts and Jobs Act (TC&JA) is the most significant reform to the U.S. Internal Revenue Code since 1986. In general, the new Tax Laws became effective for taxable years after 2017. Many provisions of the TC&JA expire or sunset before 2026, other provisions are permanent. For individual taxpayers, businesses, and business owners, this tax reform provides opportunities and traps.
Each of these tax strategies may be worth thousands, or in some cases millions, of dollars to business owners.
1. Re-evaluate your entity structure in light of the 2017 TC&JA.
Consider the advantages and disadvantages of C Corp, S Corp and LLC/Partnership. Typically, tax elections are due 2.5 months after the end of the tax year to qualify for that tax year- so by middle of March 2019, to make the elections effective for entire 2019. Get started on this now – if it is applicable to you.
2. Manage your NEW 199A savings
– which could be as high as 20% of your business income. Here’s an example: “Specified services business” such as doctors, attorneys, accountants, actuaries and consultants organized as S Corp and LLC pass through entities have new opportunity to capture tax savings if they can stay below certain income thresholds. If you do (or could) fit into this category, consider your entity tax elections, pre-paying expenses, shift income, and explore qualified or nonqualified plans to capture a 20% tax benefit. Much of this is new - as such, we suggest you see your tax advisor.
3. Transfer a portion of your business interest into irrevocable family trusts
By using a portion of your lifetime gifting exclusion – now at $11.2 million per person. These large estate planning gift exclusions are set to expire Jan 1, 2026. Therefore, this very sizable tax benefit which could save 40% or more in gift and estate taxes could be a “use-it or lose it” benefit. Explore this now.
4. Take advantage of ordinary losses
To lower your income tax. Example: offset ordinary losses with qualified plan ROTH conversions from 401K and IRA plans. In the right situation, valuable ROTH conversion can be done without out-of-pocket taxes today.
5. Bunch charitable deductions
Via your donor advised fund, especially if you seek to maximize your itemized deductions given the new Schedule A and itemized deductions. (The $10,000 restriction on state tax deduction will be a surprise to many philanthropic taxpayers.) Don’t have a donor advised fund? Give us a call and we can set it up before the end of the year.
6. Manage your 2019 income via nonqualified deferred compensation plan elections.
For 2019, C corporate tax rates are 21% and ordinary income rates at 37%. The tax arbitrage can be very attractive. Unsure if you have access to a nonqualified deferred compensation plan? Give us a call.
7. Fully fund your Health Savings Accounts (HSA)
Explore adding HSA with a company match for your employees. HSA contributions up to $6,900 (plus a $1,000 catch-up contribution) go in pre-tax and come out free of tax for eligible health care expenditures such as health insurance premiums and medical, dental, and vision expenses for your whole family. HSA contributions are powerful and unique.
8. Use your annual exclusion
$15,000 per year per donee for estate tax purposes for everything from 529 college savings contributions, contributions to irrevocable investment trusts to family life insurance. Here’s an example: A married couple with two kids has an annual exclusion of $15,000 for each child per spouse for a total of a $60,000 gift tax exclusion.
It is 4th quarter. These 8 tips are just the tip of the tax iceberg. Contact us and your tax advisor to learn more. Happy tax saving!