Getting 2018 tax returns done was messy for so many taxpayers due to changes under the Tax Cuts and Jobs Act (TCJA). Many people were surprised by smaller-than-usual refunds or even ended up owing money unexpectedly. If you struggled through tax season, now is the time to make sure that doesn't happen again! After all, these changes aren't going away, and many of them were significant for business owners. The good news: it's still early enough in 2019 to do some tax planning and make changes that will help you when you file your 2019 return. Here are three places to start. Getting these areas in order will make a big impact come tax time.
Review and close out your books monthly.
Ideally, your business books should be locked down at the end of every month. However, if that's not feasible for you at this time, you should at a minimum stay up to date on your monthly reconciliations. Reviewing the accounts month-by-month keeps you from being faced with a mountain of bookkeeping work at the end of the year, and it keeps your books more accurate too. One of the many Xero features we like is that it pulls in your bank information automatically, making reconciliations that much more efficient.
Review asset purchases and plan the appropriate depreciation schedule.
One of the most important factors we look at when tax planning is the money you're investing back into your business. You can significantly reduce your tax burden with asset purchases, but these need to be planned with care. The TCJA expanded bonus depreciation, which can allow for a 100% deduction of an asset in the year it's purchased (there are many caveats!), but it may not be to your advantage to take bonus depreciation. For example, say you finance a piece of equipment over 7 years. It almost never makes sense for a business to deduct 100% of a financed purchased in the year it was purchased because you'll have to make those 7 years' worth of payments. You can only deduct the purchase one time—meaning you can't deduct the purchase price and also the payments you make over the years. We strongly recommend consulting with a tax professional to help you plan out the appropriate depreciation schedule for big-ticket purchases.
Correctly classify your meals and entertainment expenses.
If your business has a lot of expenses related to meals and entertainment, you have some work to do on the bookkeeping side. You should be separating entertainment expenses from meals—things like sporting event tickets and club memberships are no longer deductible. Travel expenses should also be classified on their own. Meals during business travel continue to be 50% deductible, but you must keep them separate from the other expenses incurred during a business trip (e.g. airfare, hotel, cars, etc.). Employee social meals are 100% deductible, so track them separately as well.
We can't stress this enough. Tax planning depends upon time being on your side. Don't let another year go by without taking proactive measures to ease the burden of filing your tax return and ensuring you're making the most of your money.