Although tax year 2019 is our second year filing under the Tax Cuts and Jobs Act (TCJA), provisions of the law are still confusing to taxpayers, particularly as they impact small businesses. The fourth quarter is the right time for tax planning to reduce or defer your tax liability. Here are some highlighted changes that business owners should be thinking about now.

Bonus depreciation and tax planning

The TCJA expanded bonus depreciation, which allows you to deduct 100% of a business asset’s cost in the year that you place the asset into service. It can be a powerful tool for reducing your tax liability, but it’s not always an automatic yes. For example, you may consider purchasing a vehicle for your business before the end of the year as a significant tax reduction opportunity. Take a look at our earlier post, Tax deductions for business purposes, for more on the nuances of depreciating business assets. Always consult with a tax professional before making any big decisions to make sure the cost makes financial sense and include it in the bigger picture of your tax planning.

Deduction for pass-through income

Most self-employed people who have a pass-through entity have been pumped up to expect a 20% deduction off the top of their income. However, there are a number of caveats and complexities that apply, particularly if your service business qualifies as a Specified Trade or Business (SSTBs) under IRS rules, which are subject to income phase-outs.

If your income is close to the phase-out limits ($321,400 for joint filers and $160,700 for individuals), you may qualify for deductions or income deferrals to reduce your income and allow you to take full advantage of this valuable deduction. Your tax professional may also be able to recommend changes to your business that will help you to qualify for or to increase the allowed deduction. Be sure to consult with your tax professional to determine your eligibility due to the complexities of this law.

Significant changes that may impact your business

  • The definition of economic nexus changed in 2018, and almost every state has released new regulations to allow them to collect sales tax. If you have an online business that sells to customers in multiple states, you are most likely affected. Learn more.
  • Business meals and entertainment rules changed in 2018. Let us know if you need help adjusting your bookkeeping practices. Improper classifications can interfere with tax planning. Learn more.
  • Starting January 1, 2020, there will be two new types of available health reimbursement arrangements (HRAs), which will provide employers with more flexibility to offer health benefits to their employees. An HRA allows companies to provide pre-tax dollars that individuals can use to purchase health insurance in the individual market. Learn more.

Common tax credits that may benefit your business

  • The research and development tax credit allows small businesses (less than $5 million in gross receipts) to claim up to $250,000 against payroll tax liability for qualified research and development expenses. If you intend to claim this credit, you must document your activities carefully. Consult a tax professional to understand if your business may qualify.
  • The work opportunity tax credit may apply if you employ individuals from targeted groups defined by the IRS as having “consistently faced significant barriers to employment.” Targeted groups include veterans, ex-felons, assistance recipients, and the long-term unemployed. You will need to collect certification from the individual to claim the credit. Learn more.
  • If you offered paid family and medical leave (FMLA) to your employees in 2019, you may qualify to receive a credit based upon the amount paid to employees on leave. You must have a written policy and pay at least 50% of the individual’s regular wages during leave time. Learn more.

Don’t miss out on significant tax savings due to a lack of awareness of the new TCJA rules and a failure to plan before the end of the tax year. Contact us for a tax projection that can help you understand your current liability and recommend timely actions.