December 29, 2018

Business Preparation for Tax Season

Here are a few tips we’ve put together to help Business Owners in preparation to Tax Season.

Consult a Professional:

Small businesses should always consult a tax professional to discuss their tax liability. Be careful in trying to interpret tax code language on your own without professional assistance.

Many business owners/entrepreneurs understand everything about their business, but for the most part, they are not tax or accounting.

Therefore, hire a professional to give you the advice necessary to lower your tax bills, and give you ideas or options that can help your business, while the owner can concentrate their efforts in areas that they might be more comfortable with.

Any federal or state legislation that could potentially change the tax code will take time to enact, so for the upcoming tax season, small business owners should levy their costs and expenses according to the current tax structure.

The new TCJA 2018 has been the largest overhaul to tax rules ever, therefore small business owners should consider seeking professional advice on navigating their tax liabilities and expenses.

Call or make an appointment today.

IPS Accounting Services LLC

(843) 637-7100

Separate business from personal expenses:

I always suggest that my clients open a checking account just for the business income and expenses. They can draw distributions from that account to their personal account to pay for their personal expenses.

Whenever using a personal credit card for business try to designate one card for the business, we all have several credit cards but if you want to use them for business purposes, try to keep it one just for business. You can pay for this credit card with your business account. This is also helpful she tax season comes you will know that everything charged to that card is for business.

However if you must mingle your personal and business charges into one card make sure you keep good records of personal vs business. This could be tricky so be sure to keep up with it on a monthly basis.

Compliance Starts with Preparation:

For 2018 we suggested that small business owners compare their profit-and-loss margins to the 2017 tax season to avoid underpaying on their taxes.

I always suggest that my clients create a separate bank (Savings) account for taxes and put 10-15 percentage of their income in that account to save it so they are not short on tax day.

According to the IRS, if you will owe more than $1,000 in taxes, you must make estimated tax payments in the amount of 100 percent of last year’s tax liability, or 90 percent of the current year’s liability — whichever is smaller.  

The estimated tax payment method enables small business owners to keep track of their expenses in the buildup to tax filing in April, and offset any costs that occur between this point and their final submission to the IRS.

Acquire business assets:

Under the TCJA’s liberalized Section 179 deduction rules, small businesses can write off the entire cost

of qualifying property rather than recover it through depreciation. The maximum deduction this year is

$1 million (up from $510,000 for 2017). And the deduction is now available for certain tangible personal property used predominantly to furnish lodging and certain improvements to nonresidential real property (roofs, HVAC, fire protection systems, alarm systems, and security systems).

Above and beyond the Section 179 deduction, a business of any size can claim first-year bonus depreciation. The TCJA establishes a 100% first-year deduction for qualified property acquired and placed in service, generally, after 9/27/17 and before 1/1/23. Unlike under prior law, this provision applies to used property as well as new. And unlike the Section 179 deduction, 100% bonus depreciation deductions can create or increase a net operating loss for a business’s 2018 tax year.

“If you were waiting on that new computer system, you may wish to buy it now and put it in service this year and]write it all off, which reduces your overall taxable income.

Adopt a more favorable accounting method:

The cash method of accounting, which lets a business recognize sales when cash is received, is attractive to many small businesses due to its simplicity. For tax years beginning after 2017, the ability to use the cash method is greatly expanded. Any entity (other than a tax shelter) with three-year average annual gross receipts of $25 million or less can use the cash method regardless of whether the purchase, production, or sale of merchandise is an income-producing factor.

Thanks to this favorable rule, a business may be eligible to adopt cash method accounting. You will need to determine whether your clients’ average annual gross receipts are $25 million or less. If they are, and if a change would be beneficial, you can assist your clients in filing the appropriate paperwork with the IRS to change their accounting method.

And finally, the one you’ve been waiting for:

Maximize the Section 199A Qualified Business Income (QBI) deduction:

Perhaps the hottest topic of the TCJA is the new QBI deduction. Individuals who operate a sole proprietorship or own interests in a partnership, LLC, or S corporation may be able to deduct up to 20% of their qualified business income. However, the deduction is subject to various rules and limitations — and they are complex.

Although official guidance continues to be issued on this new deduction, there are some planning strategies that can be considered now. For example, clients can adjust their business’s W-2 wages to maximize the deduction. Also, it may be beneficial for clients to convert their independent contractors to employees where possible, but make sure the benefit of the deduction outweighs the increased payroll tax burden and cost of providing employee benefits.

We have put a checklist together to help you get organized.

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