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6 Tax Tips for Small Business Owners

Here’s what you and your tax professional should be discussing in order to help reduce your tax liability for 2018 and beyond.

AT THE END OF THE YEAR, small business owners are often looking for ways to minimize their companies' tax liability for the current tax year, says accountant Vinay Navani, of Wilkin & Guttenplan P.C. It’s especially crucial this year, with many changes to the way business income is calculated, the deductions you can take, and more.

As a CPA and shareholder at Wilkin & Guttenplan P.C., Mr. Navani is not affiliated with Merrill Lynch. Opinions provided are his, do not necessarily reflect those of Merrill Lynch, and may be subject to change. Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

As you work with your tax advisor, consider whether these 6 strategies could help you.

1. Determine whether your business may qualify for different tax treatment

Many small business owners can deduct 20% of qualified business income in calculating their federal taxes starting this year—“but it’s not automatic,” Navani says. The deduction generally applies to income from “pass-throughs” (whose owners pay taxes on business income themselves, rather than the business itself paying tax). However, the law limits the deduction for certain service businesses. Owners of businesses such as legal, medical, or accounting practices begin to get a reduced deduction if their taxable income surpasses $315,000 for joint filers ($157,500 for single filers). Owners of service businesses with taxable income in excess of $415,000 for joint filers ($207,500 for single filers) get no deduction.

Looking ahead to next year, you may want to consider changing your status in 2019 from a pass-through business to a C-corporation in spite of the 20% deduction, Navani says. While pass-throughs may still have advantages, the new law reduces income tax rates from 35% to 21% for all C-corporations.

Whether the switch makes sense for you is something your tax specialist can help you understand.

2. Create a smart plan for paying taxes

The sooner you have an idea of your business’s general outlook for the tax year, the better prepared you are to prevent cash flow disruptions—either by putting money aside or arranging for a line of credit to pay the IRS. Ask your accountant whether you’d be better off paying quarterly estimated taxes next year, allowing you to distribute the tax burden throughout the year instead of having to find the cash for a large tax payment in April. (You may need to pay estimated taxes throughout the year to avoid interest and possibly penalties levied by the IRS.)

3. Set up—or add to—a retirement savings plan

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For tips to help you minimize your personal tax liability, read "8 Year-End Tax Tips That Could Save You Money."

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In addition to personal IRA contributions, small business owners have several options for employer-sponsored retirement savings plans, including SIMPLE IRA, SEP IRA, 401(k), and profit-sharing plans. They differ in the amount the employer and employee can contribute, the investment options available, and the ease and expense of setting them up, among other factors. With any plan, contributions you make for yourself and your employees may be tax-deductible. Small businesses may also get a tax credit to help defray the cost of starting certain retirement plans. For calendar year taxpayers, you generally have until the due date of your tax return in 2019 (for the 2018 tax year) to contribute funds to a retirement plan for the 2018 tax year. But some types of plans must be established before the end of this year, or earlier during this year, to get the tax deduction for 2018. Ask your tax advisor.

4. Take advantage of larger deductions for equipment

If you buy new or used equipment for your company and place it in service before the end of the year, you could be entitled to a federal tax deduction of up to $1 million—nearly double last year’s $510,000. Because the deductions are intended for small businesses, they start to phase out at spending amounts starting at $2,500,000 (up from last year’s $2,030,000), ending above $3,500,000 (up from $2,540,000).

In addition, businesses can take a 100% bonus depreciation deduction on certain kinds of equipment bought and placed in service after September 27, 2017 (up from 50%). Also new: that deduction applies to purchases of used as well as new equipment. And under the new law, companies can also claim a 40% bonus depreciation deduction for certain kinds of equipment purchased before September 28, 2017 and placed in service during 2018.

5. Defer revenue and accelerate expenses—or vice versa

If your company operates on a cash basis for tax purposes and your profits seem likely to be higher in 2018 than in previous years, you may want to defer revenue during the last part of the year as a way of reducing your 2018 taxable income. Consider billing late in December or delaying the delivery of certain products or services until January. Another option: Pay some 2019 costs in advance—for example, if you're going to a trade show early that year, you may be able to pay registration fees in 2018. Alternatively, if you expect your business to be more profitable in 2019 than this year, consider accelerating cash collection before December 31 and delaying deductible expenses until after the new year.

6. Contribute to charity

Giving can not only help you fulfill your goals as a socially responsible business and engage your employees in a meaningful activity—it can provide your business with a tax deduction, usually equal to the fair market value of the property donated. However, if you own a pass-through business, be aware that your ability to deduct charitable gifts made by the business could be limited in 2018. The new law caps personal itemized deductions for state and local taxes and introduces a standard deduction of $24,000 for married couples filing jointly and $12,000 for individuals, nearly double the previous amounts. If you claim the standard deduction, you can’t write-off charitable gifts, so be sure to review your giving strategy with your tax specialist, advises Navani.

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2018 Year-End Tax Planning Guide
New higher standard deductions, changes in what you can itemize and much more: Download this helpful guide and get insights to discuss with your tax advisor and financial advisor.

3 Questions to Ask Your Advisor

  1. What is the maximum contribution I can make each year to an individual 401(k) account?
  2. What are some ways my business might go about making a charitable contribution?
  3. How can I set up a retirement plan that covers my employees as well as myself?

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Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

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