It’s that time of year! No, we’re not talking about the upcoming holidays — we’re talking about year-end tax planning. Many taxpayers don’t realize the importance of this process until it’s too late. But circling up with your tax professional and planning proactively at year-end can help you maximize deductions, defer income (and thereby manage tax brackets) and position yourself for long-term success and tax savings.
Year-end tax planning also gives you ample time to review the year and make adjustments as needed. After December 31, tax professionals are limited in the tools and strategies they can use to reduce your tax liability. A productive year-end planning session involves collaborative, in-depth discussion, and we often ask our clients a lot of questions to understand how their year is going.
For some of our producers, the winter was hard and long, and expenses were high. In certain areas, the summer was hot and dry; others were affected by too much rain, which delayed the crop harvest. Some questions that arise during our discussions include: “Are you in a federally declared disaster area?” “Did you have to sell more cull cows than normal?” We encourage you to participate in these types of discussions with your tax professionals to allow for long-range planning that is tailored to your situation and needs.
So what are some key areas to consider as you embark on year-end tax planning?
Tap Opportunities in the New Tax Law
The Tax Cuts and Jobs Act (TCJA), passed in December 2017, has created many opportunities for ag producers. It has lowered rates for each of the seven individual tax brackets, created a flat 21% tax rate for C corporations and increased the personal standard deduction as well as the Section 179 deduction limit and bonus depreciation limit.
Making year-end capital asset purchases could give you more flexibility in strategic tax planning. Starting in 2018, the deduction limit for Section 179 increased to $1 million, which is phased out when a producer’s investment in qualified property reaches $3,500,000. Another law change regarding capital asset purchases relates to bonus depreciation (another accelerated depreciation): Prior to September 27, 2017, producers could immediately deduct only 50% of the cost of qualified new property, while the remaining cost was depreciated over the useful life of the asset. Now, producers can immediately deduct 100% of the cost of new or used qualified property placed in service after September 28, 2017. You should be mindful of a few limitations within both of these changes — be sure to consult your tax advisor to see how they could affect your unique situation.
Review Proposed Regulations on Section 199A
Another TCJA change relates to the new Section 199A deduction, which permits sole proprietors, S corporations or partnerships to deduct up to 20% of the net income earned by their business. While the proposed regulations include several notable limitations, you should pay close attention to the changes related to wages paid, especially if you own an S corporation. If your S corp. does not pay adequate W-2 wages, you could receive a lower benefit when it comes to this deduction. Though the IRS has not finalized the Section 199A regulations yet, we recommend contacting your tax advisor to discuss how you may be affected by them to help ensure you receive the greatest benefit possible.
You may have plenty of opportunities to reduce your taxable income at year-end, but the clock is ticking to take advantage of them — give us a call to set up a planning meeting today!