Will you be cruising the waters on your boat or camping out in your RV this year? Besides the pleasure you can enjoy through your personal property, you may also be eligible for tax breaks, if certain requirements are met.

Following is a brief rundown of four prime tax-saving opportunities.

1. Chartering activities. It’s common for some boat owners to charter out their vessels for sightseeing or fishing excursions when they’re not being used personally. In other words, this becomes a sideline business that allows you to recoup some of your expenses.

Notably, you can use expenses to offset the taxable income from chartering activities, including the cost of fuel, repairs, insurance, supplies, equipment, mooring and storage, and even fishing gear or binoculars. Plus, you’re entitled to a generous depreciation allowance for the vessel itself.

Of course, your deductions are based on the percentage of boat use that’s business-related. For example, if you charter out the boat 50% of the time, you can deduct 50% of the expenses.

Finally, be aware that you could run into troubled tax waters if the activity is treated as a hobby, rather than a business. Under the Tax Cuts and Jobs Act (TCJA), hobby expenses are generally disallowed for 2018-2025. Also, a business operation may trigger other tax consequences (for example, self-employment tax for a sole proprietor).

2. Mortgage interest. Typically, you can deduct mortgage interest on a qualified residence, like the main place where you live, but you’re also entitled to interest deductions on a second home, like a vacation home. Surprisingly, the “residence” can also be a boat or a RV.

To qualify for this tax break under the tax code, the boat or RV must have sleeping, cooking and toilet facilities. So, if your boat has a galley, sleeping quarters and a head, you should be in the clear. You can’t just barbecue on a boat’s deck or throw a sleeping bag down below. Most RVs have the requisite facilities for this deduction.

Keep in mind that the TCJA imposes new limits on mortgage interest deductions for itemizers. It lowers the threshold for new acquisition debt from $1 million to $750,000, but prior loans are grandfathered. It also generally eliminates the deduction for home equity debt.

3. Charitable donations. Maybe you want to upgrade your boat or RV or your passion for boating or camping is waning. In any event, you might decide to donate the boat or vehicle to charity. Assuming certain requirements are met and you itemize deductions, this could provide a tax windfall.

As a general rule, you can deduct the current fair market value (FMV) of the boat or RV on the date of the donation. For instance, if you bought the RV for $80,000 years ago and it’s now worth $50,000, you deduct $50,000 on your personal return.

But don’t leave matters to chance. Obtain an appraisal from an independent professional. An appraisal is required anyway for property donations above $5,000.

Other special rules may come into play. For instance, the charity must use the boat or RV to further its tax-exempt function. Deal with a qualified charitable organization that is experienced with these types of donations.

4. Sales tax. Depending on your situation, you may be able to deduct the sales tax you pay when you purchase a boat or RV, although the rules have been complicated by the TCJA.

Previously, you could deduct all of your state and local property taxes, plus either your state and local income tax or sales tax. But now the total annual deduction for state and local tax (SALT) payments is limited to $10,000 for 2018-2025.

If you opt to write off sales tax instead of income tax as part of your annual SALT deduction, be aware that you can use either the actual tax paid, based on records, or an amount from a convenient IRS table. Generally, the actual expense method will produce a bigger deduction. Caveat: If you choose the table amount, you can add on sales tax from certain “big-ticket items” — like boats and vehicles!

To Summarize

These are just four ways you may benefit tax-wise from boats or RVs. At other times, you might use the property as transportation for hire or even claim home office deductions if you qualify under the strict letter of the law. Moral of the story: Be aware of all the tax-saving possibilities for these prized possessions.

© Copyright 2019. All rights reserved.
Brought to you by: Peterson Whitaker & Bjork, LLC

Business owners still have time to significantly reduce their tax bills for 2018. Here are seven year-end small business tax planning moves to consider, taking into account changes included in the Tax Cuts and Jobs Act (TCJA).

1. Claim 100% Bonus Depreciation for Asset Additions

Thanks to the TCJA, 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in calendar year 2018. That means your business might be able to write off the entire cost of some (or all) of your 2018 asset additions on this year’s return.
Bonus depreciation isn’t subject to any spending limits or income-based phaseout thresholds. But the program will be gradually phased out, starting in 2023, unless Congress extends it.

Consider buying some extra equipment, furniture, computers or other fixed assets before year end. Your tax advisor can explain what types of assets qualify for this break.

2. Claim 100% Bonus Depreciation for a “Heavy” Vehicle

Heavy SUVs, pickups and vans that are used over 50% for business are treated for tax purposes as transportation equipment. So, they qualify for 100% bonus depreciation

Specifically, bonus depreciation is available when the SUV, pickup or van has a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door (where the door hinges meet the frame).

If your business needs a vehicle that meets these requirements and you place it in service before the end of this tax year, it could deliver a big write-off on your 2018 tax return.

3. Cash in on More Generous Section 179 Deduction Rules

For qualifying property placed in service in tax years beginning in 2018, the TCJA increased the maximum Sec. 179 expensing amount to $1 million. (Under prior law, the limit was $510,000 for tax years beginning in 2017.)

The TCJA provides other beneficial changes to the Sec. 179 expensing rules, including:

Property used for lodging. The TCJA repealed the prior-law provision that excluded from Sec. 179 expensing personal property used to furnish lodging. So now eligible property qualifies for a tax break. This change goes into effect for property placed in service in tax years beginning in 2018 and beyond. Examples of such property include:

– Furniture,
– Kitchen appliances,
– Lawnmowers, and
– Other equipment used in the living quarters of a lodging facility or in connection with a lodging facility, such as a hotel, motel, apartment house, rental condo or rental single-family home.

Qualifying real property. Sec. 179 expensing can be claimed for qualifying real property expenditures, up to the maximum annual allowance. The Sec. 179 allowance is $1 million for tax years beginning in 2018. There’s no separate limit for qualifying real property expenditures, so Sec. 179 deductions claimed for real property reduce the maximum annual allowance dollar for dollar.

For tax years beginning in 2018 and beyond, the TCJA expanded the definition of real property eligible for Sec. 179 expensing to include qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property. These items must be placed in service in tax years beginning after 2017, and after the nonresidential building has been placed in service.

Important note: Various limitations apply to Sec. 179 expensing deductions, especially if you conduct your business as a so-called “pass-through entity” (including a partnership, S corporation or a limited liability company (LLC) that’s treated as a partnership for tax purposes).

4. Time Business Income and Deductions from Pass-Through Entities

Income and deductions from pass-through entities are allocated to the owners based on their ownership percentage in the business. Your pro rata share of a pass-through entity’s net income is taxed at your personal rates.

Under the TCJA, individual federal income tax rate brackets will basically be the same for 2018 and 2019, with modest adjustments for inflation. (See “2018 and 2019 Individual Tax Brackets” below.) So, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2018 until 2019.

However, if you expect to be in a higher tax bracket in 2019, take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2019. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate.

5. Maximize the New Deduction for Income from a Pass-Through Entity

The TCJA created a new deduction based on qualified business income (QBI) from pass-through entities. For tax years beginning in 2018 through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income.

The QBI deduction is available only to noncorporate taxpayers, meaning individuals, trusts and estates. It also can be claimed for up to 20% of income from qualified real estate investment trust (REIT) dividends and 20% of qualified income from publicly traded partnerships (PTPs).

Because of various limitations on the QBI deduction, tax planning can help increase your allowable QBI deduction. For example, before year end, you might be able to increase W-2 wages or purchase additional business assets to help boost your QBI deduction.

Also, be aware that moves designed to reduce this year’s taxable income (such as postponing revenue or accelerating expenses) can inadvertently reduce your QBI deduction. Work with your tax pro to anticipate any adverse side effects of other tax planning strategies and optimize your results on this year’s return.

6. Establish a Tax-Favored Retirement Plan

If your business doesn’t already have a retirement plan, it might be time to take the plunge. Current retirement plan rules allow for significant deductible contributions.

For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $55,000 for 2018. If you’re employed by your own corporation, you can contribute up to 25% of your salary to your account, with a maximum contribution of $55,000.

Other small business retirement plan options include defined benefit pension plans, SIMPLE-IRAs, and 401(k) plans. You can even set up a solo 401(k) plan for just one person. Depending on your circumstances, these other types of plans may allow bigger deductible contributions.

Important note: If your business has employees, your plan may have to cover them, too

The deadline for setting up a SEP-IRA for a sole proprietorship business and making the initial deductible contribution for the 2018 tax year is October 15, 2019, if you extend your 2018 return to that date. Other plans generally must be established by December 31, 2018, if you want to make a deductible contribution for the 2018 tax year. But the deadline for the contribution itself is the extended due date for your 2018 return.

There’s one exception: To make a SIMPLE-IRA contribution for 2018, you must have set up the plan by October 1, 2018. So, you might have to wait until next year if you prefer the SIMPLE-IRA option.

7. Sell Qualified Small Business Stock

A 100% federal gain exclusion break is potentially available when you sell qualified small business corporation (QSBC) stock that was acquired after September 27, 2010. That equates to a 0% federal income tax rate if the shares are sold for a gain.

However, you must hold the shares for more than five years to benefit from this break. Be aware that it’s not available to QSBC stock that’s owned by a C corporation. Plus, many companies won’t meet the definition of a QSBC in the first place. Your tax professional can help explain the details.

Need Help?

On the one hand, year-end tax planning for small businesses is easier for 2018 than for some previous years. That’s because we know the federal income tax rates that will apply next year.

On the other hand, this year’s tax planning is complicated by all the tax law changes that take effect for tax years starting in 2018. Work with your tax pro to identify the best year-end strategies for your specific business situation.

© Copyright 2018. All rights reserved.
Brought to you by: Peterson Whitaker & Bjork, LLC