This year marked the first of many under the new tax regime set in motion by the Tax Cuts and Jobs Act. Now that you have one year of experience under your belt, you can pivot your strategies to optimize your tax positions under the new legislation. Let’s walk through four easy steps you can take to ensure that next year’s tax season goes smoothly.
Review This Year’s Results
Take a look at the tax elections you made last year and see how well they served you. Bonus depreciation and Section 179 expensing were both expanded with the tax reform, giving businesses like yours more opportunities to immediately expense large capital purchases. If you utilized bonus depreciation last year, how did that decision affect the company’s bottom line? How did it affect your individual taxes and those of your business partners? Asking yourself these questions will help you know if you’re on the right track or if you need to change course for 2019.
Another change in the Tax Cuts and Jobs Act was the Section 199A deduction. More commonly known as the 20% pass-through deduction, this section of the tax code provides a deduction for owners of sole proprietorships and pass-through entities based on the amount of “qualified trade or business income” they report. If you took the deduction, see how well you benefitted from it. Were you eligible for the full deduction, or was it limited? Avoiding the limitations may not be possible thanks to some of the anti-abuse policies that are written into the regulations, but there remain some acceptable ways to ensure you get the full deduction. Chat with your CPA if you want to know your options.
Make Changes to Your Operational Processes
Revisit how smoothly your day-to-day operations functioned throughout the year. Pinpoint the areas which gave you the most grief. Was it payroll, HR, training, cash availability – something else entirely? When you uncover the root of the struggle, you can address it. Your employees, bookkeeper, auditor, or consultant will be great parties to bring into this discussion. They may have noticed some operational inefficiencies that you weren’t aware of. Your bookkeeper, for example, might notice that your reserves balance hasn’t been reviewed in quite some time. Your controller may want to explore a new asset management system that could save your team time in the long-run. Or, your business partner could be struggling under the weight of hiring a new CFO. Operational inefficiencies lead to wasted time, which leads to money squandered. Get on top of your struggles so that you can move forward unencumbered.
Gather your management team and a trusted advisor to create financial projections. Don’t just look one or two years ahead; see where you’ll be in five years, or in 10. See how your taxes will fare if your operations and tax elections stay the same. Your estimate will never be perfect since markets shift, technology changes, and tax laws get repealed and rewritten, but do the best you can with the information you have. See what you need to change, and then be willing to do it all again the next year when something changes. Projections are the only way you can plan for the long-term.
Run “What If” Scenarios
Take a business risk and see where it takes you – at least hypothetically. You can ask yourself some of the following questions:
- What if we make an S corporation election? The Tax Cuts and Jobs Act changed both corporate and individual tax rates. The restructuring may seem drastic, but it’s an option that may be beneficial under the new tax regime.
- What if we switched from accrual to cash? More entities are eligible for the cash method of accounting since the Tax Cuts and Jobs Act was passed. See if making the switch would work from an accounting standpoint and from an operational standpoint.
- What if we expanded overseas? Discuss your financial and operational abilities to expand to a new territory. See if your existing personnel could support the expansion. You may determine that you’re not ready but asking these questions will keep you focused on your goals. By researching a “what if” scenario, you’ve taken the first step toward a new level of success.
It’s never too early to start tax planning, and these four strategies will get you far. If you have any questions about what we’ve discussed or would like to talk to a Clayton & McKervey CPA, contact us today.