Many businesses saw the cost and complexity of their 2018 tax preparation increase, thanks to the tax reform. On the other hand, the new tax law brought significant tax breaks for some. Here are 5 year-end tax tips that help business owners abroad to save taxes and fully benefit from the tax changes.
(To read about year-end tax planning for individual tax payers click here)
1. Maximize your retirement savings
Entrepreneurs have unique opportunities to save for retirement. If you own a company without full-time employees other than yourself, consider opening a solo-401k by year end to take advantage of generous retirement contribution options. Even more importantly, you can contribute up to $18k into a Roth IRA which has tax free withdrawals.
If you already have a solo 401k, make sure to align your salary with your contribution level. The solo 401k must be opened before December 31, 2019 in order to be eligible for 2019 tax year.
Also consider a defined benefit profit sharing plan. We have helped many entrepreneurs open a defined benefit plan. It allows sole owner entrepreneurs to put away hundreds of thousands of dollars to a pension account, based on their income and age.
2. Maximize your business deductions
You cannot deduct losses from business activities in which you don’t “materially participate”. There is still time to increase your participation in passive activities to meet the participation requirements.
If you expect a loss, makes sure you meet the material participation standard. Tests include:
- Spend over 500 hours per year in day-to-day operations.
- Perform substantially all the work in the activity.
- Complete more than 100 hours per year and more than anyone else.
This could also apply to real estate investment activities. If you are actively managing a property and actively looking for real estate deals, you might be able to deduct losses.
3. Optimize your business expenses
Unlike many eliminated deductions for individuals, deductions for businesses remained largely intact under the new tax law. It even introduced new opportunities for higher deductions like the 100% bonus depreciation.
Under the Tax Cuts and Jobs Act, you might be able to write off 100% of qualified assets acquired in 2019. Consult with your tax advisor for what types of assets qualify for the 100% bonus depreciation.
Therefore you should make major qualifying purchases, such as equipment, before the end of this year.
4. Adjust your inventory accounting
If you haven’t already done so last year, review your inventory accounting to see if you should adjust your accounting method. Small retailers with less than $25 million in sales and hold inventory can elect to treat the inventory as “non-incidental” material and supplies. (Prior to 2018 the threshold was $1 million.)
This can simplify for accounting and even result in significant tax savings, especially for retailers and Amazon resellers if they qualify.
5. Reevaluate your business structure
The tax law brought big changes for businesses, such as for pass-through taxation, the new GILTI tax and others. The IRS clarified and gave move guidance for these new provisions in the 2018 tax year.
This resulted in tremendous savings for some – allowing clients to take foreign tax credits for companies in high tax jurisdictions and get an effective tax rate of 10.5% for companies in lower tax ones.
On the other hand it added more complexity, e.g. Form 5471, adding many new schedules, form 8992 for GILTI calculations, and more options for restructuring.
Now is the time tax-optimize your business structure to leverage the tax changes to your advantage.
For example, it might be beneficial to make a 962 election, own the foreign company in a C Corp or just convert the entire business to an S Corp.
We have also helped more clients this year move to Puerto Rico to take advantage of Act 20 and 22. Those two Acts allow zero tax on capital gains as well as a 4% corporate tax.
Our sister company Global Expat Advisors specializes in offshore business structuring. If you haven’t already done so, schedule a structuring consultation.
Year-end tax planning for businesses pays off
Bring the year to a good close for your business and set it up the right way for the next year. It is difficult enough when everything is based in the US. Having an international business or running a business when living abroad adds complexity but also opens opportunities.
Review you tax situation, retirement planning and business structure with an experienced advisor.