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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 2019 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 WilkinGuttenplan. This year’s conversation with your tax professional could be an important one, as many accountants more fully grasp provisions of the Tax Cuts & Jobs Act for the second tax year it’s in effect, with potential impact on the way business income is calculated, the deductions you can take, and more. It’s also worth keeping an eye on the news, for further changes may come from a tax package that some in Congress are hoping to pass by the end of this year.

As a CPA and shareholder at WilkinGuttenplan P.C., Mr. Navani is not affiliated with Merrill. Opinions provided are his, do not necessarily reflect those of Merrill, and may be subject to change. Merrill, its affiliates and financial advisors do not 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—“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. For tax year 2019, owners of businesses such as legal, medical, or accounting practices begin to get a reduced deduction if their taxable income surpasses $321,400 for joint filers ($160,700 for single filers). Owners of service businesses with taxable income in excess of $421,400 for joint filers ($210,700 for single filers) get no deduction.

Looking ahead to next year, you may want to consider changing your status 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 2017 Tax Cuts and Jobs Act reduced income tax rates from 35% to a flat 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 Tax Tips That Could Save You Money This Year."

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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 2020 (for the 2019 tax year) to contribute funds to a retirement plan for the 2019 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 2019. 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 $1.02 million. Because the deductions are intended for small businesses, they start to phase out at spending amounts starting at $2,550,000, ending above $3,570,000.

In addition, businesses can take a 100% bonus depreciation deduction on certain kinds of equipment bought and placed in service after Sept. 27, 2017 (up from 50%). That deduction applies to purchases of certain used as well as new equipment.

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 2019 than in previous years, you may want to defer revenue during the last part of the year as a way of reducing your 2019 taxable income. Consider delaying the delivery of certain products or services until January. Another option: Pay some 2020 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 2019. Alternatively, if you expect your business to be more profitable in 2020 than this year, consider accelerating cash collection before Dec. 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 2019. The recent Tax Cuts and Jobs Act capped personal itemized deductions for state and local taxes. The standard deduction for 2019 is $24,400 for married couples filing jointly and $12,200 for individuals. 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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2019 Year-End Tax Planning Guide
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