Did you feel like your taxes were minimized last year? If not, it’s possible you may have missed out on some opportunities.
Federal tax reform through the Tax Cuts and Jobs Act provided some of the best tax benefits to businesses in more than 50 years. The corporate tax rate was slashed from the graduated maximum of 35% to a flat 21%.
There also was big news for smaller businesses – the new Qualified Business Income Deduction offers possibly the greatest tax benefit to pass-through businesses in more than 60 years. QBI allows qualified small business owners to simply not pay income taxes on 20% of their qualified income in tax years 2018 through 2025.
While every tax situation is different and savings are not guaranteed, most of the businesses we work with had a good 2018 tax year.
Did you? If not, download our free Top 6 Tax Reform Opportunities for Business guide. Learn about the latest tax strategies for businesses to see if you could benefit.
Download the guide now, or check out one of the six strategies below:
Expanded Use of Cash Method Accounting
Pre-tax reform, C Corps with average annual gross receipts of more than $5 million for the previous three tax years generally weren't allowed to use the cash method. This also was the case for entities with average annual gross receipts of more than $5 million that were:
- Partnerships with C corporation partners, or
- Limited liability companies (LLCs) treated as partnerships for tax purposes with C corporation members.
Instead, these taxpayers had to use the accrual method of accounting. That limited their opportunities to manage taxable income over several years by altering the timing of income and deductions to minimize the cumulative federal income tax liability for those years.
Under the new tax rules, cash method accounting is allowed for these taxpayers if their average annual gross receipts for the three previous tax years didn't exceed $25 million. This change was beneficial for some of our clients.
For one of our business clients, we filed a change of accounting method, which reduced their book income from $2.2 million to $1.2 million. That resulted in an accrual cash reduction of $810,000.
From the $810,000 reduction of income, they saved over $300,000 in taxes. This business owner also took advantage of the new QBI deduction, which totaled $250,000 in his case.
Click below to watch a video of this Tax Reform Client Case Study.