If you own a small business (defined by the US Small Business Administration as having fewer than 500 employees), or a microbusiness (one that employs fewer than 10 employees), I’m sure you already know how important it is to keep your expenses low. After all, the risks associated with starting a business are high: According to the SBA, just over 20% of new businesses fail during the first two years, about half fail during the first five years, and nearly two thirds fail during the first 10!
What you may not know, however, is how to minimize the amount of tax you’ll need to pay. Before you wind down your business activities for the year to focus on the holidays, take a moment to think ahead: A bit of due diligence before the end of 2019 could help position you for a lower tax bill come April.
Go Holiday Shopping for your Business
While you’re in gift-buying mode anyway this month, consider purchasing assets you need for your business. That’s because, under the Tax Cuts and Jobs Act (TCJA), you can take a 100% first-year bonus depreciation for qualified property purchased and placed into service this year. For business owners who are expecting to have a large total income in 2019, it may make sense to move up the timing of some planned purchases.
Set Up a Retirement Plan
Entrepreneurs and business owners have lots of options when it comes to setting up tax-advantaged retirement plans, and contributions to these plans can help you lower your taxable income significantly. If you are self-employed and set up a SEP IRA, you can contribute up to 20% of your earnings up to $56,000 for 2019. (Those who are employed by their own corporations can contribute up to 25% of their salaries, but the $56,000 cap still applies.) You can drag your feet a little on this one — SEP IRAs don’t have to be set up before the end of the year, but will need to be set up before you file your 2019 taxes.
A Solo 401(k) could be a better option if you are self-employed, over 50, and need to “catch up” on your contributions. If you have a Solo 401(k), you can contribute up to $19,000 for 2019, and an additional $6,000 if you are over 50. Then, your business can add to your contribution with a “profit-sharing” contribution of up to 25% of payroll. Like the SEP IRA, a cap contribution of $56,000 exists for those under 50, but the cap extends to $62,000 for those over the age of 50 who make the maximum individual contribution. If a Solo 401(k) sounds like an option you’d like to pursue, you’ll need to act fast. The plan needs to be set up during the tax year, even if you don’t fund it right away.
A third, but more complicated, option includes the creation of a cash-balance pension plan. This option, in combination with a 401(k) profit sharing plan, allows business owners to deduct hundreds of thousands of dollars. At AMDG Financial, we have assisted numerous business owners with these types of plans, and I recommend working with a fiduciary adviser if you elect to set up this kind of plan.
If you have an LLC, a sole proprietorship, S corporation, or partnership, you are considered a “pass-through” (sometimes also called “flow-through”) entity. This term describes the way money from your business passes income to you personally and is taxed at your personal rate. If you expect to be in the same, or a lower tax bracket in 2020 (assuming the federal income tax brackets stay roughly the same), you may want to consider accelerating your deductible expenditures into this year while deferring some income into next year — that would shift part of your tax burden forward. The opposite approach would make sense if you expect your tax bracket to be higher in 2020. In that case, you would accelerate your income and push out your expenditures. In this situation, the income you bunched into this year would be taxed at a lower rate. Again, a financial or tax adviser can help you sort out what’s best for you.
A Final Note
If you pay estimated taxes quarterly, have you paid enough to equal at least 90% of your tax for the current year (or 100% of the tax shown on your 2018 return)? Now is the best time to figure that out to avoid having to pay a penalty. December is also a great time to get your company’s books in order so you can be ready to file as soon as you have all the proper forms in 2020. It will give you peace of mind over the holidays, as well as a more sure-footed start to the new year.
Our financial and tax teams work together, integrating our clients’ tax, financial and investment strategies to help them pay only the tax they owe. If we can be of assistance, please contact us. We’d be glad to help.