Congress is aiming for a tax bill to be enacted before Thanksgiving. It’s unclear what will be in the bill and when the provisions will be effective. I’ve always advised that business decisions should be tax-sensitive, factoring in the tax implications of buying, hiring, and taking other actions. But in this period of uncertainty, what’s a business owner to do? Businesses can’t stand still waiting for Congress to address taxes.
Here are some actions to think about between now and the end of the year with current tax rules and the possibility of tax changes in mind.
If tax rates are cut, the value of a tax deduction diminishes. Thus, if rates are going to be lower in 2018 than they are now, the purchase of needed supplies and other items that can be expensed will provide a greater tax write off this year as compared to next year. For example, a C corporation or owner of a pass-through entity in the 35% bracket now saves $35 on a $100 purchase of a printer toner (deduction of $100 x 35%). If the taxpayer would be in the 20% bracket as a result of a rate cut, the savings would drop to $20.
Buy equipment and machinery
Current deduction options for these investments—first-year expensing (Sec. 179 deduction) and 50% bonus depreciation—are generous. For most small businesses it means an immediate write-off for substantial purchases, even if they are financed in whole or in part. Again, factoring in a possible rate cut, the value of this write-off likely is even greater this year than next year. But even if the rate cut isn’t significant, obtaining needed equipment to run your business more efficiently is a wise business decision, with some tax savings to boot.
Note that bonus depreciation currently is scheduled to decline to 40% in 2018, 30% in 2019, and zero thereafter. Whether the anticipated tax law will change this is unclear.
If, like 54% of small business owners polled by NFIB you’re planning on hiring, consider workers who may entitle you to claim a tax credit. The work opportunity credit applies for hiring workers from targeted groups, such as certain disabled veterans and the long-term unemployed. The credit reduces your tax bill dollar for dollar and, depending on the group, ranges from $2,400 to $9,600.
Find more information from the Department of Labor.
There’s a generous tax credit for research and development costs. Maybe you’re developing a product you hope to bring to market. But qualified costs also include those for the development of internal use software for financial management functions, human resources management functions, and support service functions. Whatever happens with tax rates, tax incentives for research likely won’t diminish (they could even be increased). For startups that meet certain conditions, the tax credit for R&D can be used to offset up to $250,000 of an employer’s Social Security taxes (especially helpful for startups with no profits on which to pay taxes).
Stay in touch with your CPA
There may be last-minute opportunities in a new tax law, such as using a tax break that’s set to diminish or expire, so be prepared to act quickly. The best way to do this is to make sure your CPA will inform you promptly of Congressional developments on tax changes and will work with you to determine the best strategies for your business.