How to Lower Your Business Tax Bill Next Year
Capitalize on new tax law changes affecting small businesses in 2019
Recent changes in the Tax Cuts and Jobs Act may allow you to reduce your business’s taxable income earlier next year by accelerating your depreciation on some key fixed assets. To figure out the best ways to save your business money, we spoke to Dan Nicholson, a CPA with Nth Degree CPAs. In this new tax law environment, we all want to hear what Dan has to say.
“Every business owner wants to figure out the best way to pay less in taxes. And right now, we’re seeing the largest tax law changes in the last 30 years. So there’s a lot of new material to work with.”
— Dan Nicholson
Here are some tips:
1. Claim depreciation earlier
It’s now possible to claim depreciation earlier on certain assets. With higher depreciation as an expense, your net profit will be lower in the current year, which lowers your tax bill next year.
A few quick facts:
In the past, bonuses were capped at $500,000 of deductions that could be made on qualifying property. The amount has been raised to $1 million.
Some assets can now be depreciated by 100 percent in the first year (previously it was 50 percent). This treats the asset as an expense.
Certain farm machinery and equipment qualifies for the recovery period, which has been shortened from seven years to five.
Consult your accountant or financial advisor to see whether any of these changes apply to your business. There are many variations and exceptions, so it’s crucial you speak to a professional who knows your business’s specific circumstances.
2. Use end-of-year to your advantage
The end of the year is a good time to adjust parts of your business to “reduce” net profit, which lowers your next tax bill.
“It’s also important to review tax saving decisions throughout the year, not just at the end, in case you need to make adjustments as you go.”
— Dan Nicholson
Consider the following steps to cut your tax bill:
Buy fixed assets just before the end of your fiscal year (not just after) so you can claim a portion of depreciation right away.
Delete any assets that are no longer in use or have zero value. This is similar to reducing the value, but this time the asset will be scrapped. The remaining book value will be reduced to zero, and whatever was left becomes “loss on sale of asset,” which will reduce your net profit.
Consider having an end-of-year sale to clear out old stock and reduce your cost of goods sold. Even if you take a loss on some stock, it’s better to have it cleared out rather than sitting around. Not only will you convert old stock to cash, but you will be removing the value of the old stock off your books.
Make sure income received in advance is counted next year. If you were paid for work that you didn’t need to do until the next financial year, don’t count it in the current year’s sales.
3. Get organized
The new tax law makes it more important than ever to keep detailed records of everything. If you’re extremely organized and track every business expense, you’ll never miss claiming — and, as a result, you’ll pay less tax.
“With these tax changes, it’s even more important to plan and have a strategy in place. You can’t claim an expense you can’t document, and the IRS may disallow deductions if you can’t support them.”
— Dan Nicholson
Here are a few organizational tips:
Keep records for business expenses and personal expenses separate. For example, if you’re claiming a vehicle, you must keep a journal to show the percentage of the vehicle’s business use.
File everything in logical order: every receipt, invoice or proof of purchase (even for cups of coffee purchased for a business meeting).
Leverage technology. Accounting software will track every expense and make sure you never forget to claim. Ask your accountant or financial advisor which accounting software suits your business best.
Use efficiency software such as Receipt Bank, which makes it easy to track small amounts
4. Set up a work area at home
Set up a room in your house as your office, and use it specifically for your business (even if your main business is located elsewhere). You can claim a portion of expenses related to the business use, and let’s be honest — chances are you work from home.
To qualify, you must use the area exclusively for business on a regular basis, either as your principal place of business or as a setting to meet or deal with patients, clients or customers.
To calculate the portion that you can deduct, divide the area of the workspace by the total area of your home.
“If you rent your home, you don’t need to declare any revenue to the IRS if it’s under 15 days. But the same applies anytime you use your home for business: staff meetings, planning days or events. You charge a fair market value rate for the ‘venue’; pay yourself from the business; the business gets to claim the cost as an expense (lowering your net profit and tax bill).”
— Dan Nicholson
5. Split your income
It makes sense to allocate any income to the lowest tax bracket, and there are two main ways to do this legally:
If you own a corporation, you can decide to take a salary and pay yourself bonuses, or you could leave some of the profit in the business (especially if the corporate tax rate is lower).
Consider allocating some of your business’s income to your partner or children if they are working in the business with you, even if it’s only part time.
6. Find out what else you can legally claim
There are lots of other ways to lower your tax bill, such as paying into a number of funds and savings plans.
“There are other decisions to make, such as deciding if being a C corporation will help, how the 20 percent pass-through deduction applies to your business, and if the time spent applying for research and development credits is worth it.”
— Dan Nicholson
Use the new tax law to your advantage
The new tax law gives every business a chance to pay less in taxes next year. All you need to do is plan ahead and follow some key advice to ensure that you’re claiming everything you’re allowed to. Your immediate next step is to contact your accountant or financial advisor to identify how the new changes will benefit your business.*
For business owners like you, we know every dollar counts. Talk to an Umpqua small business banker today about how we can help your business bank smart.
*Umpqua Bank does not provide tax advice, and this content is provided for informational purposes only.