An End-of-Year Checklist for Minimizing Your Business Tax Burden in 2018

As the year quickly draws to a close, the time has come for businesses to start the onerous process of preparing for tax season. Although the end of the year tends to be hectic, it is crucial to begin gathering paperwork and planning strategies in order to reduce your business’s 2018 tax burden. Recent changes to federal tax law—most notably the Tax Cuts and Jobs Act (also known as tax reform)—have made it particularly important for businesses to carefully examine the tax savings opportunities available to them.

As you review your records in preparation for tax season, ensure that your business has taken the following steps in an effort to minimize taxes: 

• Verify that you have claimed the §179D deduction for energy efficiency projects completed in 2017. Section 179D of the tax code offers commercial building owners and primary designers—such as architects and engineers who develop qualifying projects for public buildings—a deduction of up to $1.80 per square foot for energy-efficient improvements to a building’s envelope, lighting, or HVAC systems. As a “tax extender,” the §179D deduction expired on December 31, 2016, but was retroactively renewed only for projects completed in 2017 by the Bipartisan Budget Act. While this popular incentive could potentially be renewed again in the future, commercial building owners and designers should act swiftly to claim it for eligible projects completed last year. 
• Ensure that your business is properly classified for maximum savings under the Tax Cuts and Jobs Act. The new tax law grants pass-through entities—including sole proprietorships, S-corporations, and partnerships—a substantial deduction of up to 20 percent. While this will be a boon to many small and mid-sized businesses, the deduction is not available to certain service-based businesses, such as law firms, accounting firms, and medical practices, with taxable income over $315,000. In addition, the Tax Cuts and Jobs Act lowered the corporate tax rate from 35 to 21 percent. Therefore, businesses should work with their tax advisors to determine whether it is more advantageous for them to be classified as C-corporations or pass-through entities. 
• Determine whether your business may be eligible for the Research and Development (R&D) Tax Credit. The Protecting Americans from Tax Hikes (PATH) Act of 2015 permanently added the R&D Credit to the tax code and expanded its utility for smaller and newer businesses by allowing them to apply the credit toward their payroll tax burdens. In light of these changes, businesses in a wide variety of industries—ranging from architecture and engineering to construction and manufacturing—should examine their project records and consult a tax expert to determine whether they may be eligible for this lucrative credit. Claiming the R&D Credit requires thorough documentation of qualifying activities, so it is best to begin the preparation process in advance of tax season. However, the effort may be more than worthwhile—businesses routinely receive six-figure tax savings through the R&D Credit.
• Take advantage of expanded bonus depreciation. The concept of bonus depreciation allows businesses to depreciate a certain percentage of the cost of new business property during the year it is placed into service, and then depreciate the remainder of the cost over the property’s useful life. However, through tax year 2022, the Tax Cuts and Jobs Act will allow businesses to deduct 100 percent of the cost of eligible property during its first year in service. This will yield more substantial and immediate tax savings than depreciating the property over a longer period of time. 
• Consider investing in Opportunity Zones. Added to the tax code by the Tax Cuts and Jobs Act, Opportunity Zones are economically distressed communities in which certain investments may qualify for favorable tax treatment. With a goal of spurring economic development and job growth in these communities, the new tax law allows investors to defer capital gains taxes owed when they invest in Qualified Opportunity Funds (“O-Funds”). O-Funds are partnerships or corporations established to facilitate investment in qualified property located in Opportunity Zones. Investors are permitted to defer tax on prior gains invested in an O-Fund until December 31, 2026 or the date when the fund is sold or exchanged—whichever is earlier. Investors do not need to live, work, or have businesses in Opportunity Zones in order to take advantage of the tax benefits of investing in O-Funds. For more information, visit https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions. 
• Determine whether your business is eligible for the new employer credit for paid family and medical leave. Another opportunity for tax savings enacted by the Tax Cuts and Jobs Act is §45S of the tax code, which grants employers a credit equal to a percentage of wages paid to qualifying employees on family or medical leave. If the employer pays at least 50 percent of the employee’s regular pay, the credit equals 12.5 percent of wages paid during family and medical leave; this amount increases by 0.25 percent for each subsequent percentage point over half the employee’s regular pay. Employers that continue to pay employees 100 percent of their wages while on leave may receive the maximum tax credit of 25 percent of wages. To qualify for the credit, employers must have a written policy in place describing various aspects of the paid leave policy. Employers should read IRS Notice 2018-71, which provides more in-depth information on the paid family and medical leave tax credit, and review their workforce policies to determine whether they may qualify for the credit in 2018 or upcoming tax years.
• Ensure that your business is compliant with state sales tax laws. Businesses that sell goods out of state have always contended with a confusing patchwork of sales tax rates and exemptions among the country’s more than 10,000 jurisdictions. However, in light of the Supreme Court’s recent decision in South Dakota v. Wayfair, numerous businesses are now facing a costly compliance burden. In Wayfair, the Court ruled that states may require online retailers to collect sales tax on internet purchases—even if the retailer lacks any physical presence, such as a factory or office, within the state. In the months since the Wayfair decision, several states have enacted legislation requiring out-of-state sellers to collect sales tax if they meet certain criteria. Given these changes, businesses that conduct sales transactions with customers in multiple states should ask their tax advisors about pursuing a nexus review. At Capital Review Group, our nexus reviews are designed to identify a client’s past, present, and potential future sales tax collection responsibilities. We can help you formulate a plan to mitigate tax liabilities, ensure compliance with changing state laws, and implement systems and processes to monitor sales transactions completed in various states. 
• Consider conducting a cost segregation study. In addition to the §179D deduction, one of the most powerful ways for commercial building owners to reduce their tax burdens is through the IRS-approved strategy of cost segregation. Real property is usually depreciated over 39 years, while tangible personal property is depreciated over five, seven, or fifteen years. A cost segregation study examines a parcel of real property and divides it into personal property assets—thus enabling the building’s owners to minimize taxes and boost cash flow through accelerated depreciation deductions.
• Examine your hiring practices and determine whether you may qualify for the Work Opportunity Tax Credit (WOTC). For any business, the workforce is one of its most valuable assets—and one of its greatest ongoing expenses. WOTC grants employers an opportunity to offset some of the costs of hiring by providing a tax credit of up to $9,600 for each qualifying employee hired from a target group, as defined by the Department of Labor. These groups include veterans, recipients of government assistance, and summer youth workers. Employers must act quickly if they believe that they have made a WOTC-eligible hire: initial paperwork must be filed with the state workforce agency within 28 days of the new employee’s start date. The PATH Act extended WOTC through December 31, 2019, so now is the time for employers to review their hiring practices and determine whether they may qualify for WOTC with recent or future hires.

As your business prepares for tax season, one of the most important steps you can take is to work with an experienced tax professional to ensure that you are maximizing savings. At Capital Review Group, we work with businesses and their tax or financial advisors to claim all available tax incentives and provide guidance in light of changing laws, including the shifting landscape of state sales tax laws. Act now to begin planning for tax season—contact CRG today at 877-666-5539 to schedule a pro bono analysis!