As year-end approaches, many of my florist clients begin to ask questions about what they should do to prepare. The most common question: How do I reduce my taxes? Here are some tips based on my experience working with floral industry businesses.
Questions of Profit
If your business is showing a profit, then you want to reduce the profit as much as possible to keep the tax bill low. Nobody wants to give more than their “fair share” to the IRS. If you are not showing a profit, then all of this tax talk becomes less important, but we can still make moves now that will set you up to reduce the profit in future years.
Some considerations include:
Depreciation. Depreciation is now one of the biggest tax advantages we have available. Several changes have been made to the depreciation rules, which, in general, are very good for tax planning.
The federal 179 (expensing election) has been increased to $1,000,000. Therefore we can elect to accelerate depreciation on assets up to this $1 million. The election for 179 is made by taking the 179 depreciation. You can take $1 or $1 million or any number you choose in between to dial in your tax liability exactly where you want it.
Tax Tip: 179 depreciation also applies to certain building improvements!
Another big change is bonus depreciation, which is now 100 percent of assets purchased, with no limit. Bonus depreciation automatically applies to all purchases unless you elect out of bonus depreciation. This means that all assets you buy that have a class life of 3, 5, 7 or 10 years are automatically depreciated 100 percent in the year of purchase. You can opt out of bonus depreciation totally for the year, or by each life class.
Tax Tip: If you are not showing a profit, or only showing a small profit, for the year and fail to elect out of bonus depreciation, you may be taking write-offs that do you no good for taxes this year and may not be available next year. Bonus depreciation can only be carried forward as a net operating loss, which may or may not be created and is therefore probably not your best planning technique.
Pass-Through Tax Deduction. There is also a new deduction this year that applies to all business forms except regular (or C) corporations. This is the new “20 Percent Pass-Through Business Deduction.” For those businesses that are eligible, all profit is reduced by 20 percent before the taxes are calculated. There are limitations, which you will need to discuss with your accountant. This deduction also applies to rental income and publically traded partnerships, but not other passive income such as interest, dividends or capital gains.
Tax Tip: Maximize self-rents! If you own the building that your “C” corporation occupies, you can increase rental income and take advantage of the 20 percent deduction that is not applicable to the “C” corporation’s profits. You can also minimize “S” corporation shareholders’ payroll! Reducing salaries of ”S” corporation shareholders will increase the profit of the ”S” corporation, and since the “S” corporation gets the 20 percent deduction this will save the owner taxes. This strategy will also save the owners and the company payroll taxes. However, you do need to make sure that the shareholders continue to earn a “reasonable salary” for their time worked.
Derrick P. Myers, CPA, CFP, PFCI, is the president of Crockett, Myers & Associates Inc.