It's that time of year again where folks start scrambling to figure out how to lower their tax bill for the year by making last minute maneuvers. If you're reading this now, I am going to venture to guess that you might be one of said folks.
This is the second time around for year-end tax planning under the Tax Cuts & Jobs Act. We've received additional guidance and information from the Treasury since last year, but there is still quite a bit that remains in various shades of gray between black & white.
100% Bonus Depreciation: Some of the lowest hanging fruit comes from 100% bonus depreciation. Buy equipment now, finance it if you'd like, and deduct 100% of the total cost of the asset during the year it is placed into service. This applies to used equipment too. Previous the TCJA, it was 50% and the equipment had to be new.
Qualified Business Income Deduction (QBID): Make sure you maximize the QBID under Section 199A. The QBID allows for up to a 20% reduction of taxable income from the passthrough income from a partnership, an S Corporation, an LLC or a Sole Proprietorship. If your taxable income, before the QBID, is below $321,400 (married filing jointly) or $160,700 (all other filing statuses), you're good to go and you will get the entire 20% QBID, so long as your overall taxable income doesn't limit the deduction. If you are above these taxable income amounts, then you will either be partially or fully phased out of the deduction if your business is a Specified Service Trade or Business (SSTB). If you need help on this determination, please contact us.
If you are an SSTB and are above the $160K/$321K thresholds, then for you it's going to be about reducing your taxable income from both the business and from all other sources of income, as well as maximizing deductions on the individual side. This is where maxing out your SEP/401(k), purchasing equipment, accelerating or batching (think Donor Advised Fund) just about any deduction can result in greater than one dollar deducted for each dollar spent because you'll be unlocking more and more of the QBID.
If you're business is NOT an SSTB, then you're going to want to make sure you pay out enough W-2 wages to maximize the deduction and/or put equipment into place, as suggested above. Why? You can utilize a QBID equal to 50% of total W-2 wages paid OR 2.5% of the unadjusted basis of fixed assets PLUS 25% of W-2 wages paid. Obviously, you'd be choosing whichever method was most advantageous. A good rule-of-thumb for the 50% of W-2 method is that you'll want to make sure you to get total W-2 salaries/wages as close to 28.75% of pre-salary taxable income as possible to maximize the deduction. Trust us on this one, ask us if you're curious.
Let's end this post on an easy note: make your mortgage payment that you'd otherwise make in early January by the end of December. If you do this, then you'll have one more interest payment reported on your Form 1098 come tax time, accelerating that deduction by a full year.
One last parting thought before picking this back up again on our next blog entry...a number of expenses have been disallowed under the Tax Cuts & Jobs Act, but what many Californians have forgotten is that CA did not conform to most provisions of the TCJA so many of those expenses are still deductible for state income tax purposes even though they might not be for Federal tax purposes. Knowledge dropped...Part 2 to follow shortly.
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