Whether it's loading up on retirement savings or taking a 20 percent deduction, small-business owners are running out of time to save on their 2018 taxes.
This has been a busy year for all taxpayers, as the Tax Cuts and Jobs Act went into effect in January 2018.
The largest changes as a result of the tax overhaul include a higher standard deduction ($12,000 for single filers and $24,000 for married-filing-jointly in 2018), the loss of personal exemptions and new limitations on certain itemized deductions.
See below for the 2019 income tax brackets.
The new tax code also raised questions for small-business owners, who were faced with a number of changes, including the introduction of a new tax break in the form of the 20 percent qualified business income deduction.
"Don't try to do this yourself," said Cari Weston, CPA and director of tax practice and ethics at the American Institute of CPAs. "The taxes have changed a lot and you need to talk to someone before the end of the year."
Here are a few of the year-end tax planning items entrepreneurs should be aware of as the year winds down.
Small-business owners received a gift from the tax overhaul in the form of a 20 percent qualified business income deduction. This is a break for pass-through entities, including sole proprietorships and S-corporations.
As attractive as the break seemed, qualifying for it is no easy feat.
For instance, business owners wanting to take the full deduction must have taxable income below $157,500 if single or $315,000 if married.
Limitations on the break kick in above those thresholds.
And to make matters more complicated, "specified service trades or businesses," including doctors, lawyers and other professionals, can't take the deduction if their taxable income exceeds $207,500 if single ($415,000 if married and filing jointly).
This limitation initially spurred a burst of creative tax planning, as accountants weighed different methods to help entrepreneurs qualify.
The IRS responded this summer with a crackdown on certain strategies, including "crack and pack," a tactic in which an otherwise ineligible business splits itself in two so that one entity can take the deduction.
Some uncertainty still remains over defining a trade or business within the context of the legislation, particularly with real estate, said Jeffrey Levine, CPA and CEO of BluePrint Wealth Alliance
For instance, if someone owns a building, but the tenant agrees to pay all real estate taxes, insurance and maintenance on the property, does the owner have the right to take the 20 percent deduction?
That's not immediately clear, but it's unlikely that that will deter filers from nabbing the break, said Levine.
"This is an area where people will be aggressive claiming the deduction," he said.
Uncle Sam cracked down on business owners' schmoozing with clients in the Tax Cuts and Jobs Act, curtailing the extent to which they can claim deductions for meals and entertainment.
Under the old tax law, employers could deduct 50 percent of the cost of entertainment-related meals and 50 percent of the face value of a ticket to a sporting event.
Now, the cost of the entertainment itself is no longer deductible. You can deduct 50 percent of the cost of business meals if you or your employee is present with the prospect or client, and the meal isn't extravagant.
That means you can deduct the chicken wings you're eating at the baseball game with your client. In order to write off the meal, be sure that you obtain a receipt for the food and that it's separate from your game tickets.
"Say you were in a luxury box at a stadium, the food and drinks must be billed separately from the entertainment," said Tim Steffen, CPA and director of advanced planning at Robert W. Baird & Co.
If you want to deduct the cost of running your side gig, you need to make sure that you have a legitimate business and not just a hobby.
That's because the Tax Cuts and Jobs Act did away with a break that allowed you to write off hobby expenses up to the amount of hobby income.
This was among a handful of miscellaneous itemized deductions that were deductible to the extent they exceed 2 percent of adjusted gross income.
The IRS distinguishes between hobbies and businesses, based on the amount of time you spend on it and the work you do to make it profitable.
"You need a profitable motive in order to take a deductible loss," said Weston.
Make your side gig official by opening a bank account for your business and using a separate credit card for those expenses, she said.
Protect yourself by establishing a limited liability company or an S-corporation for your business, which can offer you legal protection from creditors.
Kill two birds with one stone: Reduce your taxable income and shore up your savings by contributing to your retirement plan.
"If you're self-employed, max out your SEP IRA," said Lisa Greene-Lewis, a CPA with TurboTax.
Generally, entrepreneurs with SEP IRAs can put away up to 25 percent of their net earnings from self-employment up to $55,000 for 2018 ($56,000 for 2019).
Self-employed individuals who want to figure out exactly how much they can save for retirement in a given year will need a special calculation that factors in their business's net profit and the self-employment taxes they pay.
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