As we move through December, students will start taking final exams. Think back to your school days; were you a crammer or a planner? Imagine studying and preparing all year for an exam on material that is completely new to you. You are told you can study for twelve months and the exam will begin after a one month wait. This is the situation we find ourselves in with the new tax law. The time for studying will end this month, and after about another month to approve tax forms, update tax software, and provide tax information, the final exam will begin. Will you receive a passing grade on your tax return exam?
Whether you’re a planner or crammer, December is a time to look back over the information and make the final preparation push. Changes that were presented over the last year are listed below along with feedback from the planners:
1. Some deductions have come and gone, and are no longer available.
The deduction for entertainment expenses
The Domestic Activities Production Deduction
Unreimbursed employee expenses section of schedule A
Alimony (if your divorce is finalized after December 31, 2018)
2. Some deductions have been capped.
The limit for the state sales tax, state tax, real estate tax, and personal property taxes on your schedule A is capped at $10,000
3. Some deductions have been expanded.
The 50% bonus deduction is now the 100% expensing of assets deduction, subject to limits
Section 179 was expanded to $1M on assets of 2.5M
Business owners can use the cash method if their revenues average $25M or less for the last three years
4. Some deductions are new.
The 20% pass through deduction for Qualified Businesses
Many planners were concerned about more than one of the items above. Most of the questions circled around the 100% bonus deduction and the entertainment deduction. Many planners thought that business meals were no longer deductible as well, but that’s not the case.
In addition to the changes above, there was a thought that many companies would convert to a C-Corporation to take advantage of the flat 21% tax rate. To a large extent, that did not happen. There were a few planners that could have taken advantage of the conversion, but didn’t pull the trigger for one reason or another.
Another tax strategy that taxpayers were exposed to was to bunch their charitable contributions. With the near doubling of the standard deduction, and the $10,000 cap on property taxes, the ability to itemize deductions is limited for some taxpayers. Many planners asked questions about how to accomplish this, and one of the most common responses was a Donor Advised Fund (DAF) or a Foundation. Clients’ overall concern was that this strategy would not work with their current charitable contribution strategy. Planners were given options to still stay on track with their contributions and maximize their contributions on their tax returns.
Finally, taxpayers were exposed to the concept of planning and what that means for their business to move from a crammer to a planner. Guidance was provided on what it means to be the CEO of a company or organization and develop a team to help you continue in that role. One planner that took advantage of these concepts was able to increase his revenue, cut expenses, and save $1.1M in taxes during the 2018 tax year.
If you’re a planner, congratulations! You have set yourself up to pass the 2018 tax exam. If you’re a crammer, it may be too late to take advantage of some of the concepts presented above. But there’s still time to buckle down, sharpen the pencil, and get to work so that you have a fighting chance to pass the exam. It’s never too late to change from a crammer to a planner; maybe you just need the right trusted advisor or accountability partner. A new year could be the start of a new you.