It seems like a lifetime ago that I sat down at my desk with a pile of folders ready to attack “tax season”. Perhaps it was. It’s been almost 30 years since I moved to be “exclusive” with business valuation, forensic accounting and litigation support. Although I am no longer routinely prepare income tax returns, I still keep up with the tax code – for no other reason than to be fluent when asked to lecture at various legal conferences or provide expert testimony.
So, in the season of giving, I thought I would provide some thoughts regarding a few selected tax issues you should consider before the end of the year.
Year-end tax strategies for accrual-basis businesses
The last month or so of the year offers accrual-basis taxpayers an opportunity to make some timely moves that might enable them to save money on their 2018 tax bills. 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 2019. Doing so will enable you to deduct those expenses on your 2018 federal tax return.
Common examples of such expenses include commissions, salaries and wages; payroll taxes; advertising; and interest. Also look into expenses such as utilities, insurance and property taxes. You can also accelerate deductions into 2018 without paying for the expenses in 2018 by charging them on a credit card. (This works for cash-basis taxpayers, too.)
In addition, review all prepaid expense accounts and write off any items that have been used up before the end of the year. If you prepay insurance for a period beginning in 2018, you can expense the entire amount this year rather than spreading it between 2018 and 2019, as long as a proper method election is made. This is treated as a tax expense and thus won’t affect your internal financials.
There are many other strategies to explore. Here are just a few:
- Review your outstanding receivables and write off any receivables you can establish as uncollectible.
- Pay interest on all shareholder loans to the company.
- Update your corporate record book to record decisions and be better prepared for an audit.
This year, in particular, The Tax Cuts and Jobs Act (TCJA) has brought a number of changes altering many long-established tax provisions. Some of these are that you should be familiar with are as follows:
Alimony deduction is coming to an end
TCJA eliminates the tax deduction for qualified alimony payments, effective for divorce decrees or separation agreements issued or executed after December 31, 2018. It won’t affect existing arrangements or arrangements finalized before the end of 2018.
Currently, alimony payments are deductible by the payer and included in the recipient’s taxable income. This makes it possible to shift income from the payer, who is typically in a higher tax bracket, to the recipient, who is usually in a lower tax bracket. Once the deduction is eliminated, payments will no longer be deductible by the payer or taxable to the recipient.
These changes provide divorcing couples with an incentive to finalize their proceedings by the end of this year. Some alimony recipients may be tempted to delay their divorces until next year, when the payments are no longer taxable. But the deduction can be advantageous to both parties, because it minimizes their combined income tax, making more after-tax income available for division.
Beware the “kiddie” tax
At one time years ago, parents could substantially reduce their families’ overall tax burden by shifting income to children in lower tax brackets (usually by transferring investments or other income-producing assets). The kiddie tax was designed to discourage this strategy by taxing most of a dependent child’s unearned income at the parents’ marginal rate. The tax applies to children age 18 or younger plus full-time students age 19 to 23 (with certain exceptions).
Under the TCJA, the kiddie tax is imposed according to the rates applied to trust income. The trust tax brackets are compressed, so that the highest marginal rate (currently 37%) kicks in when taxable income exceeds $12,500. In contrast, for a married couple filing jointly, the top bracket begins at $600,000 of taxable income. The impact of this change will depend on a family’s particular circumstances. In general, it will reduce the cost of the kiddie tax for relatively small amounts of unearned income, but many families will find that the top kiddie tax rate is now higher than the parents’ marginal rate.
Small businesses: Consider an HRA
Under legislation passed in late 2016, qualifying small businesses (those with fewer than 50 full-time or full-time-equivalent employees) are permitted to use Health Reimbursement Arrangements (HRAs) without running afoul of the Affordable Care Act. A cost-effective alternative to group health insurance, HRAs are employer-funded plans that use pretax dollars to reimburse employees for out-of-pocket medical expenses and individual health insurance premiums.
Late last year, the IRS issued Notice 2017-67, providing guidance on the eligibility requirements and tax implications of these Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). Among other things, reimbursements from QSEHRAs are nontaxable to employees provided they maintain “minimum essential coverage.”
This review is not intended to be all inclusive, rather to provide a condensed list of year-end tax considerations. If you have any questions or comments please feel free to reach out us at the above phone number.
ATTORNEY’S THAT HAVE READ THIS POST HAVE ALSO READ THE FOLLOWING POWERPOINT PRESENTATION
“The Tax Cuts & Jobs Act”