Small Business Taxes & Management

Special Report

Year-End Planning--Part 1--2017 Basics


Small Business Taxes & ManagementTM--Copyright 2017, A/N Group, Inc.




At this time we have only a hint at what the new tax legislation Congress is working on will look like. While the tax rates have been revealed, there's no indication of where the rates start and end because the brackets haven't been defined. Will the limit on deferrals to a 401(k) be lowered? A drop to $2,400 (from $18,500 for 2018) was suggested, then rebuffed by the president. But was that posturing, getting taxpayers ready to accept a smaller drop or will the higher limit remain untouched? Don't be surprised if the limit is lower. On the business side, is no-limit expensing of asset purchases in? What about interest deductions? Will provisions in the new law be retroactive? Some may be but it's too late in the year to implement all the changes proposed. Moreover, it would be inequitable.

Clearly it's still to early for serious planning, but there are steps you can take to get ready, and in some cases to hedge your options. One thing appears to be clear--if a tax bill does pass tax rates will be lower next year, particularly for business owners. And, for individuals, some items deductible in 2017 won't be deductible in 2018.


General Comments

The theory behind business tax planning is similar to planning for your personal return. You want to defer the income to a low tax rate year. If you do business as a sole proprietorship (i.e., file a Schedule C), S corporation, partnership, or LLC (limited liability company), income and losses of the business are passed through and reported on your personal tax return. Thus, your approach to year-end planning is similar to that for individual planning. (There are some factors that can complicate the issue; they're discussed below.) And, yes, while it's true you can save taxes by making equipment and other purchases, you're out-of-pocket cost is still more than 50%. For example, you purchase a $1,000 laptop. If you're in the 39.6% bracket for federal purposes and 10% for state, you're effective tax rate is probably about 46% (you get a deduction for your state taxes on your federal return). That means the government is picking up $460 of the cost; you're paying for the other $540. If you're self-employed or doing business as a partnership or LLC, your rate will be slightly higher when you add in the self-employment tax. (Want to get a better idea of the cost? Go to What's a Deduction Worth? on our Frequently Asked Questions page.) Best suggestion? As always, economic considerations come first. Don't buy what you don't need; don't buy more than you need.

For a list of tax rates, facts on alternative minimum tax, standard deduction, credits, etc. go to our Tax Tables page for the details.


Projecting Your Income--Business

Before going any further you've got to have a good handle on the income from your business. Your accounting records are a good starting point, but more than likely you'll have to adjust them to conform to the tax accounting rules. Here are some possible adjustments:

Check with your accountant on these issues. Hopefully, the differences will be slight, and, if so, can be ignored. Annualize your income (e.g., take the first 10 months, divide the income by 10 and multiply by 12) to figure your full-year profit or loss. Don't forget to account for any variations during the year. For example, if you're a retailer, the Christmas season is important and simply annualizing won't work. Same if you run a concession stand at the beach.

Businesses that operate as a sole proprietorship, LLC, partnership, S corporation, etc. have their income (or losses) passed through to the owners and reported on the owners' individual tax returns. That means you'll have to project both the businesses income and your personal income to evaluate your tax bracket. See below.


Projecting Your Income-Personal

If you do business as an S corporation, sole proprietorship, etc. your share of profits or losses are passed through and taxed on your personal return. (If you, or you and your spouse are the only shareholders in an S corporation, taking a smaller or larger salary won't change the outcome materially. A larger salary will just mean the pass-through income from the S corporation will be reduced and vice versa.) That means you'll have to do a projection of your personal as well as business income before you can do any serious planning. Assemble your records for the first 10 months of the year. If you record income and expenses on a regular basis, this should be a snap. The purpose of this article is to determine if it makes sense to make any last minute capital expenditures to take advantage of bonus depreciation, etc. While we've included a list of items to take into account at the personal level, you can cheat and estimate some of them. For example, your charitable contributions usually run $500 to $1,000. For now your best guess is good enough. Concentrate on the bigger numbers.

Caution!--If you turned 70-1/2 this year you'll have to start taking distributions (required minimum distributions or RMD) from your IRA and certain other plans if you're a business owner or retired. Check the rules with your accountant or the plan trustee. You don't want to incur a penalty--its 50% of the amount that should have been distributed.

Estimating your expenses and deductions. You've also got to come up with an estimate of your deductions. The items below are common deductible expenses.

Finding your tax bracket. If you've got a good handle on your income and expenses you can net the two to arrive at your taxable income. Be sure to also subtract out personal exemptions (use $4,000 each for yourself and spouse and dependent children). If your AGI exceeds certain thresholds your personal exemption and itemized deductions may be limited.

If you're pretty confident of your computations, you can find your tax bracket by using the Tax Tables in our Reference File. Keep in mind that long-term capital gains and qualifying dividends are taxed at a lower rate. Go to our Tax Tables for the details.

Caution. There's a good possibility you'll be subject to the alternative minimum tax (AMT) and the net investment income tax. That can make the computations much more complex. If you don't want to talk to your tax adviser, get a computer program. Initial or planning versions of popular programs are available or should be shortly.


Hedging in 2017

If there is a major shift in tax law for 2018 and future years, rates may be lower and you could lose some of your itemized deductions. That would suggest taking as many deductions this year as possible while delaying income to 2018. But you can overdo it, particularly if your income and deductions are usually fairly level from year to year. While it's too early for a true strategy, you can hedge your bets. Planning significant dental work or a medical procedure for 2019? If you can break the 10% of AGI threshold for medical expenses, get the work done this year. Get ready to pay any real estate taxes due in 2017 but not delinquent until sometime in 2018 this year. Owe back taxes on property? Plan to pay this year. Same for state income taxes. No or low state income taxes? You may be able to deduct sales taxes. You can add big ticket items such as a car, boat, recreational vehicle, etc. to any "table" amount. That suggests accelerating such a purchase into 2017 may make sense.


More to Come

We may have more information on the possible shape of the new tax law around November 1, or shortly thereafter.

We'll discuss specifics of tax planning for businesses in the next article and planning for individuals in the final article.


Copyright 2017 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536

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--Last Update 10/26/17