With over 130 new tax provisions, the historic Tax Cuts and Jobs Act offers year-end tax planning opportunities for individuals and businesses. 

It’s a perfect time to double-check whether any of these opportunities are a fit for your situation.

For Business Owners

Business Income Deduction

The new 20 percent deduction from qualified business income (QBI) has received a lot of attention since it was enacted last year.

Known as Section 199A, it permits owners of sole proprietorships, S corporations or partnerships to deduct up to 20 percent of the income earned by the business.

However, while a lot of advisors know “of” the deduction, relatively few have really dug into the details of the new provisions and the proposed treasury regulations that were issued this summer.

While the purpose of Section 199A is crystal clear, the provision is still up for interpretation, so it’s a good idea to have an accountant or adviser who really understands how it will impact tax planning.

Excess Business Losses

While the QBI has garnered a lot of talk, a separate provision has received relatively little attention. The latter provision limits the deductions that can be taken for “excess business losses.”

Essentially, these are losses from trades or businesses of the taxpayer that exceed $250,000 per year ($500,000 for joint filers). This provision prevents utilizing large business losses to offset income from investments and wages and can create huge surprises for business owners who are unaware of the provision.

Bonus Depreciation and Section 179

For years, a significant portion of year-end planning has involved selecting from among available depreciation alternatives for business property added each year. That planning has become even more important with the new 100 percent bonus depreciation deductions, which allows businesses to take 100 percent bonus depreciation on qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023.

In addition, Section 179 allows business owners to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the year.

These are two opportunities for business owners to ask their advisers about during year-end tax planning.

Operating Losses

The rules relating to overall net operating losses changed drastically beginning in 2018.

Historically, those types of losses could be carried back up to two years in most circumstances and carried forward up to 20 years. The loss carrybacks and carryforward could also fully offset taxable income in a given year.

Those rules are no longer in place, and net operating losses in 2018 can no longer be carried back. Carry-forward losses can only offset up to 80 percent of taxable income in a subsequent year.

These provisions make proper timing of deductions and income planning even more critical to ensure that overall tax goals are reached.

Payroll Taxes, Self-Employment Taxes and the Net Investment Income Tax

Though not a direct change related to the Tax Cuts and Jobs Act, recent years have seen many changes to the overall taxation of income outside of the income tax arena.

Rules related to taxation of income outside of the income tax context (specifically employment tax and net investment income tax) have been changing significantly in recent years. The overall effect of those nonincome taxes is becoming a bigger part of overall tax liability for many business owners.

Proper planning needs to be in place to avoid, to the extent possible, the application of these taxes to portions of a taxpayer’s overall income.

For Individual Taxpayers

Itemized deductions

Personal income tax planning has similarly seen a lot of changes this year.

In years past, many business owners automatically assumed that they could itemize deductions because that itemization generally resulted in lower overall tax.

As such, many business owners made charitable contributions personally and out of their business if they would receive tax benefits for those contributions.

That is not necessarily the case beginning in 2018.

While charitable contributions are still deductible, they only produce a benefit if a taxpayer itemizes deductions versus taking the standard deduction.

The standard deduction increased in 2018 to $24,000 for married-filing-jointly taxpayers, and many itemized deductions were taken away or limited.

Specifically, the itemized deduction for state and local taxes has been limited to $10,000 per year (that includes all state and local income taxes, as well as real estate taxes and personal property taxes on nonbusiness assets), and miscellaneous itemized deductions have been eliminated altogether.

Therefore, many taxpayers will find that modest charitable contributions may not produce any significant tax benefit. Proper planning needs to be considered to make sure that the maximum benefit available is achieved for that charitable giving.

Capital Gains on Investments

While the rates applicable to ordinary income have changed, the rates for capital gains have remained substantially unchanged. Therefore, it is necessary to take a closer look at the tax burden associated with these types of gains.

While the market may dictate whether you have gains, taxpayers can control the timing of those gains by choosing when to liquidate appreciated investment positions, or alternatively “harvesting” loss positions in the same year. Many taxpayers also choose to utilize appreciated investment assets for charitable giving to avoid capital gains.

529 Plans

Historically, 529 plans are a great way to save for college tuition. Earnings in a 529 plan can be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other post-secondary schools.

However, thanks to the Tax Cuts and Jobs Act, 529 plans can now be used to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year.