Is 2018 a Good Year to Strategically Increase Income?

by Karen Stern

The Tax Cuts and Jobs Act was spun politically as tax simplification legislation. However, for some individuals, especially small-business owners, wrapping up 2018 tax planning may not be so simple.

The 20% pass-through deduction for qualified business income sounds great, but it does not apply to everyone. There are definite hurdles to overcome before taking the deduction, and for most businesses, careful planning will be necessary to gain maximum benefit.

Rather than taking the deduction, focusing on increasing income may be a better strategy for some small-business owners. In the past, common advice was to reduce business income to save money on taxes. Employers frequently implemented strategies such as accelerating asset depreciation and distributing higher bonuses to employees.

This year, reducing taxable income may not be necessary to substantially reduce taxes. 2018 may be an opportunity for business owners to increase taxable income in their pass-through businesses. Owners may choose to forgo their former tax planning methods and instead reduce wages and bonuses to put more of the income on the small-business tax return. For C-corporation owners, reducing taxable income may not be the best option because the corporate tax rates are also lower this year.

Another way to increase income and take further advantage of tax cuts is to pull more money out of retirement accounts to pay the tax now. Because of changes to the tax brackets, 2018 taxes may be lower than they have been for a while.

To learn more about how the tax reform law could impact your end-of-year tax planning, contact your financial adviser or Karen Stern, partner in charge of the Brown Smith Wallace Entrepreneurial Services Group, at kstern@bswllc.com.

Karen Stern, CPA, (kstern@bswllc.com), partner in charge, Brown Smith Wallace Entrepreneurial Services Group, provides tax and accounting services for companies ranging from start-ups to $20 million in revenue.