Arm yourself with what you need to know to prepare for your small business taxes in 2018.
With tax reform working its way through Congress right now, it’s unclear yet precisely which provisions of the bill will ultimately be passed into law and when those new rules will take effect. Despite this uncertainty, a new tax year is right around the corner.
That means many small business owners and their tax advisors are working to make plans right now for what we know about 2018, as well as getting ready to act quickly if the finalized tax legislation warrants it. Here’s what we know now about tax season in 2018.
Higher Contribution Limits for Retirement Savings
Do you contribute to an employer-sponsored retirement plan such as a 401(k) or IRA? You and your employees may be able to contribute more in 2018.
Employees who participate in certain retirement plans, such as 401(k)s, 403(b)s, and 457 plans will be able to contribute $18,500, a $500 increase from the current $18,000 limit. Participants over the age of 50 can make additional “catch-up” contributions. They’ll also be able to contribute an extra $500 annually, or $24,500 per year, up from $24,000 in 2017.
If you or your spouse are covered by an employer-sponsored plan and also contribute to an IRA, you may be able to deduct more of your IRA contribution in 2018. Individuals covered by a workplace retirement plan see their deductible contributions start to be phased out when their Adjusted Gross Income (AGI) reaches $63,000.
Their deduction is fully eliminated with an AGI of $73,000 and above. Married couples where one spouse is covered by a workplace retirement plan have their deductible contributions phased out starting with an AGI of $101,000 and completely eliminated at $121,000. When neither spouse is covered by a workplace retirement plan, contributions are phased out with an AGI of $189,000 and eliminated at $199,000.
Higher limits also impact Roth IRA contributions in 2018. High-income individuals may not be able to make Roth IRA contributions at all of their AGI is above certain limits. For 2018, those phase-out limits are as follows:
- Singles and heads of household: $120,000 to $135,000
- Married couples filing jointly: $189,000 to $199,000
- Married couples filing separately: $0 to $10,000 (unchanged)
Higher Annual Gift Exclusion
Do you hope to pass your business on to your children or grandchildren someday? Although small business owners are well aware of income taxes, estate taxes may not be on their radar.
The estate tax is imposed when property passes upon death to anyone other than a spouse or charity in excess of an “applicable exclusion” amount. That exclusion amount is $5.6 million per individual.
That’s a pretty hefty exclusion amount, but remember that it includes not just the value of your business, but all other assets including real estate, retirement accounts, investments, life insurance proceeds and anything else of value you own at the time of death.
And the estate tax rate is not small potatoes. As it stands, the federal estate tax on assets exceeding the applicable exclusion amount is 40%. Many states impose their own estate tax as well, which can bring the total estate tax to well over 50%.
Estate taxes can be so crippling that it’s often difficult for the heirs to come up with sufficient cash to pay those taxes without selling the business or taking on debt. That’s why gifting a small interest in your business each year is a good way to ensure your legacy lives on without saddling your heirs with debt.
For 2018, you can gift up to $15,000 per person, per calendar year in cash or other property without creating any gift tax implications. This is known as the “gift exclusion.”
Gifting an interest in your business is a complex matter, so this is not something you’ll want to handle on your own. However, if you believe your total estate may exceed the applicable exclusion limit and want to pass your business on to the next generation, it’s worth having a conversation with your tax advisor.
For assets with a useful life of more than one year, you generally must depreciate the cost of the asset over a period of several years rather than expensing the cost of the asset in the year it’s purchased.
However, Section 179 of the Tax Code allows a business to deduct the full purchase price of financed or leased furniture, equipment, and off-the-shelf software in the year the asset is placed into service. For a few years, the limit for Section 179 expensing changed from year to year, with Congress often making businesses wait before raising it retroactively in a stimulus package.
That back and forth ended in 2015 when the Protecting Americans from Tax Hikes (PATH) Act made Section 179 expensing permanent. It set the limit at $500,000 and allowed it to be raised in $10,000 increments, tied to inflation.
For 2017, the limit is $510,000, although businesses with more than $2,030,000 million in purchases have their Section 179 deduction phased out dollar-for-dollar. An increase for 2018 has not yet been announced.
No matter the size of your business, you can still take advantage of bonus depreciation, albeit at a lower rate for 2018. For 2017, businesses can claim immediate 50% bonus depreciation on the cost of all equipment acquired and put in service during the tax year. For 2018, bonus depreciation will phase down to 40%.
Per Diem Rates
Do you compensate employees for lodging, meals and incidental expenses while they’re traveling for business?
Businesses are allowed to reimburse employees using standard per diem rates instead of using actual expenses. Per diem payments are not included in the employee’s wages for tax purposes as long as the payments are less than or equal to the federal per diem rate, and the employee provides an expense report.
Each year, per diem rates are adjusted to reflect the cost of living adjustments. The new per diem rates became effective October 1, 2017, and will continue into 2018.
As of that date, the per diem rates for meals and incidental expenses (including meals, room service, laundry, dry cleaning, and fees and tips for servers and luggage handlers) is $63 per day for travel within the continental U.S. For travel outside of the continental U.S., the rate is $68 per day. The rate for incidental expenses only is $5 per day.
Of course, those numbers won’t go far if you’re traveling to a high-cost locality such as San Francisco or New York City. For those and other high-cost localities, the per diem rate is $283 per day or more. You can find a complete list of high-cost localities in IRS Notice 2017-54.
Keep in mind that per diem rates aren’t as useful for self-employed people, as they can only use per diem for meal costs. If you’re self-employed, you’re better off keeping excellent records and using exact numbers.
Remember that unless otherwise noted, these changes go into effect January 1, 2018. That means they will not impact your 2017 tax returns that will be filed in early 2018. And corporate tax reform could affect not only C Corporations but other entity types as well. We may see lower rates, but fewer deductions and credits.
That could influence the decision to accelerate deductions into 2017, defer income to 2018, or vice versa. The best strategy is simply working with your tax advisor to follow current tax law while keeping an eye on the future.
about the author
Janet Berry-Johnson, CPA, is a freelance writer with over a decade of experience working on both the tax and audit sides of an accounting firm. She’s passionate about helping people make sense of complicated tax and accounting topics. Her work has appeared in Business Insider, Forbes, and The New York Times, and on LendingTree, Credit Karma, and Discover, among others. You can learn more about her work at jberryjohnson.com.