Year-End Business Tax Planning
With the new tax law in affect for this year, tax planning is more crucial than ever. Most small businesses will now qualify for a new Qualified Business Income (QBI) deduction. This is a deduction you will get on your personal return equal to 20% of your business profit if you are not a specified service business. If you are a specified service business you can still get the deduction if your personal adjusted gross income is below $207,500 for single tax payers and $415,000 for married tax payers. If your income is between $157,500/$315,000 and $207,500/$415,000 your deduction will be phased out.
Therefore, the first planning point will be maximizing this deduction. Taking accelerated depreciation, paying more in wages, or accelerating expenses may not be as useful as it was in the past – unless you are trying to stay below the phase out levels mentioned above. If you are trying to stay below the phase out limits then you may also want to consider maxing out retirement savings, HSA contributions, etc. so you remain eligible for this deduction.
We also need to rethink officer wages. We want to pay enough in officer wages to stay off the IRS audit risk radar, but the more wages we pay the less profit we have. The less profit we have the less QBI deduction we get. Because there are so many other factors that go into to determining officer wages such as social security and retirement planning, fair compensation, tax withholdings, etc. determining officer wages is more complicated than ever.
And finally, if your income is above the $207,500/$415,000 and you are not a specified service business (doctors, lawyers, accountants, athletes, and performers) you can still get a deduction equal to the lesser of 50% of wages, or 25% of wages plus 2.5% of your purchase price of any property or other assets of the business. Specified service business above the threshold do not get a QBI deduction.
Simple right? Since there are so many moving parts and each business is going to have it’s own unique set of circumstances that change each year, tax planning is crucial! Please give your CPA a call to ensure you are getting the biggest deduction you can!
Karena Sylvester, CPA