Small Business Tax Briefs- Year End Edition 2

With the possibility that tax law changes could go into effect next year that would significantly reduce income tax rates for many businesses, 2017 may be an especially good year to accelerate deductible expenses. Why? Deductions save more tax when rates are higher.

 

Timing income and expenses can be a little more challenging for accrual-basis taxpayers than for cash-basis ones. But being an accrual-basis taxpayer also offers valuable year-end tax planning opportunities when it comes to deductions.

 

Tracking incurred expenses.  The key to saving tax as an accrual-basis taxpayer is to properly record and recognize expenses that were incurred this year but won’t be paid until 2018. This will enable you to deduct those expenses on your 2017 federal tax return. Common examples of such expenses include:

You can also accelerate deductions into 2017 without actually paying for the expenses in 2017 by charging them on a credit card. (This works for cash-basis taxpayers, too.)

As noted, accelerating deductible expenses into 2017 may be especially beneficial if tax rates go down for 2018.

 

Prepaid expenses.  Also review all prepaid expense accounts. Then write off any items that have been used up before the end of the year.  If you prepay insurance for a period of time beginning in 2017, you can expense the entire amount this year rather than spreading it between 2017 and 2018, as long as a proper method election is made. This is treated as a tax expense and thus won’t affect your internal financials.

 

And there’s more …  Here are a few more year-end tax tips to consider:

To learn more about how these and other year-end tax strategies may help your business reduce its 2017 tax bill, contact us.

One way to reduce your 2017 tax bill is to buy a business vehicle before year end. But don’t make a purchase without first looking at what your 2017 deduction would be and whether tax reform legislation could affect the tax benefit of a 2017 vs. 2018 purchase.

 

Your 2017 deduction.  Business-related purchases of new or used vehicles may be eligible for Section 179 expensing, which allows you to immediately deduct, rather than depreciate over a period of years, some or all of the vehicle’s cost. But the size of your 2017 deduction will depend on several factors. One is the gross vehicle weight rating.

 

The normal Sec. 179 expensing limit generally applies to vehicles with a gross vehicle weight rating of more than 14,000 pounds. The limit for 2017 is $510,000, and the break begins to phase out dollar-for-dollar when total asset acquisitions for the tax year exceed $2.03 million.

 

But a $25,000 limit applies to SUVs rated at more than 6,000 pounds but no more than 14,000 pounds. Vehicles rated at 6,000 pounds or less are subject to the passenger automobile limits. For 2017, under current law, the depreciation limit is $3,160. And the amount that may be deducted under the combination of Modified Accelerated Cost Recovery System (MACRS) depreciation and Sec. 179 for the first year is limited under the luxury auto rules to $11,160.

 

In addition, if a vehicle is used for business and personal purposes, the associated expenses, including depreciation, must be allocated between deductible business use and nondeductible personal use. The depreciation limit is reduced if the business use is less than 100%. If the business use is 50% or less, you can’t use Sec. 179 expensing or the accelerated regular MACRS; you must use the straight-line method.

 

Factoring in tax reform.  If tax reform legislation is signed into law and it will cause your marginal rate to go down in 2018, then purchasing a vehicle by December 31, 2017, could save you more tax than waiting until 2018. Why? Tax deductions are more powerful when rates are higher. But if your 2017 Sec. 179 expense deduction would be reduced or eliminated because of the asset acquisition phase out, then you might be better off waiting until 2018 to buy.

 

Also be aware that tax reform legislation could affect the depreciation limits for passenger vehicles, even if purchased in 2017.

 

These are just a few factors to look at. Many additional rules and limits apply to these breaks. So if you’re considering a business vehicle purchase, contact us to discuss whether it would make more tax sense to buy this year or next.

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2018 Q1 tax calendar: Key deadlines for businesses and other employers

• File 2017 Forms W-2, "Wage and Tax Statement," with the Social Security Administration and provide copies to your employees.
• Provide copies of 2017 Forms 1099-MISC, "Miscellaneous Income," to recipients of income from your business where required.  Read more on these requirements here.
• File 2017 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.  Read more on these requirements here.
• File Form 940, "Employer’s Annual Federal Unemployment (FUTA) Tax Return," for 2017. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 12 to file the return.
• File Form 941, "Employer’s Quarterly Federal Tax Return," to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2017. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 12 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,"Employer’s Annual Federal Tax Return.")
• File Form 945, "Annual Return of Withheld Federal Income Tax," for 2017 to report income tax withheld on all non-payroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 12 to file the return.

• File 2017 Forms 1099-MISC with the IRS if 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is April 2.)

• If a calendar-year partnership or S corporation, file or extend your 2017 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2017 contributions to pension and profit-sharing plans.