Small Business Taxes & Management

Special Report

Year-End Tax Planning--Part I


Small Business Taxes & ManagementTM--Copyright 2019, A/N Group, Inc.



General Comments

Tax professionals have had a lot of experience with the new tax law. For taxpayers in more complex situations there are still many unanswered questions. How did taxpayers fare under the new law? It depended on each individual's situation. Far fewer people itemized. The $24,000 standard deduction ($24,400 for 2019) for a couple along with the $10,000 limit for tax deductions meant you were unlikely to come out better itemizing unless you had relatively significant mortgage interest. For example, a couple who owned their own home had to come up with $14,000 in a combination of medical, charitable, and mortgage interest deductions to equal the standard deduction. The calculus changes for single individuals. The standard deduction was 12,000 ($12,200 for 2019). You could easily hit the $10,000 limit on the deductions for taxes. That would mean you'd need only $2,000 more in a combination of medical, charitable, and interest deductions to get about the standard deduction amount. That's not so tough to do. Because of these rules taxpayers with relatively simple returns have fewer chances to plan than in the past.

Before doing any serious planning you should review your income and expenses for the year. If you have a business operating as an S corporation, partnership, LLC, or sole proprietorship, the income and losses will be passed through to you. So you've got to have a good idea of how the business is doing. Much the same applies if you have a rental property (or properties) and can deduct the losses or if the property throws off income. Fortunately, rental properties tend to be more stable than an operating business.

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 37% bracket for federal purposes and 10% for state, you're effective tax rate is probably about 45% (you get a deduction for your state taxes on your federal return). That means the government is picking up $450 of the cost; you're paying for the other $550. 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. 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 (or 11 if you have them) months, divide the income by 10 (or 11) 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.

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. Your chance of getting hit with the alternative minimum tax (AMT) is substantially less than before the 2017 tax law change. But it's still possible. If you were subject to it in 2018 there's a chance you may face it again.

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



Copyright 2019 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. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536

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--Last Update 12/05/19