Most tax rules are fixed and you must follow them. But there’s some flexibility which is provided through special tax elections. Here is a roundup of elections you may want to consider with respect to your 2018 return or think about as an option for 2019.
Writing off equipment purchases
If you bought and placed in service equipment or certain types of property, you have some choices to make. In making these choices, consider the impact they have on other tax breaks.
Whether you want to take certain write-offs depends on your overall tax picture for the year. If you want to optimize deductions, then you can go for it. For example, if you’re in a specified service trade or business and are trying to lower your taxable income in order to maximize your qualified business income (QBI) deduction, then you go for all the deductions you can.
[Related: How Do I Figure Out Estimated Tax Payments?]
But if you’re in a loss position, you may not want to optimize deductions now. You may be barred from claiming losses due to the excess business loss limitation. Similarly, if you are a new business with little or no revenue, you may get little or no benefit from write-offs now. If you don’t claim write-offs now, you may be able to do so in the future when you are profitable.
Write-off options include:
- Section 179 deduction. In order to use this first-year expensing option of up to $1 million in 2018 ($1,020,000 in 2019), you must elect it on Form 4562.
- Bonus depreciation. You expense the cost of qualified property unless you elect not to do so; elect out on Form 4562. Making the election applies to all property with the same recovery period (e.g., 5 years, 7 years). The election out is made by attaching a statement to the return indicating the class of property for which the election is being made and that, for such class, no special depreciation allowance is claimed. For partnerships and S corporations, the election out is made by the entity and not the owners.
- De minimis safe harbor. For tangible items, you can elect not to capitalize them (i.e., don’t add them to your balance sheet). This means you can treat them as non-incidental materials and supplies which are deductible up to $2,500 per item or invoice. Using this safe harbor allows for a current deduction without the ongoing recordkeeping for depreciable items.
Accounting method changes
If you want or need to make a change in an accounting method, you may be able to do so when filing your tax return. Many accounting method changes qualify for an automatic change in accounting method; no advance IRS permission is needed.
For example, if your business is a C corporation with average annual gross receipts in the 3 prior years not exceeding $25 million (“the gross receipts test”), you can switch from the accrual to the cash method of accounting if you choose to do so. In 2019, the gross receipts test is based on $26 million.
If you sold property and will receive at least one payment after the year of the sale, you are treated as having sold on an installment basis. This means the gain is automatically spread over the period in which payments are received (other than any depreciation recapture, which occurs in the year of sale). But you can elect out of installment reporting and take all of the gain into account in the year of the sale. This is done simply by reporting the full gain on the return for the year of the sale. Whether it is advisable to do this again depends on your overall tax picture for the current year and your projections for the future.
If your business is a partnership, or limited liability company filing a partnership return, then you may want to think ahead with respect to potential audits. Under new rules, the IRS will audit the partnership and make adjustments at the partnership level. This means that the partnership may have to pay additional taxes unless it elects to push out adjustments to partners. This new centralized audit regime (also referred to as the BBA regime because it was created by the Bipartisan Budget Act of 2015) applies automatically. However, small partnerships can elect out of the BBA regime (i.e., the IRS would have to audit individual partners with respect to any partnership items).
[Related: How Do I Add a Partner to My Business?]
The election out applies only if there are 100 or fewer eligible partners. These are individuals, C corporations, “eligible foreign entities,” S corporations or estate of deceased partners.
The election out of the BBA regime is made on a timely-filed return; just check the box for the election out on Form 1065 and complete Schedule B-2, Election Out of the Centralized Partnership Audit Regime. Also, notice of the election must be given to partners within 30 days.
Usually, you have until the extended due date of your return to make the elections, but there are some variations on these deadlines. You may want to request a filing extension to give yourself more time to consider these and other elections. Work with your CPA or other tax adviser to get the best overall results from your election options.
Barbara Weltman is the founder of Big Ideas for Small Business, Inc., which publishes Idea of the Day. She is the author of J.K. Lasser’s Small Business Taxes 2019 and other books that inform the small business community of tax, financial, and legal information they should know about.