Approaches to Reducing 2019 Taxes for Your Laboratory
A CPA's take on the new tax law
Bruce Bryen, CPA, CVA
What has the taxation professional learned from 2018 that will assist in 2019 and the following years? Many changes occurred for 2018 filings of individual and business tax returns. Quite a few of these from 2018 will continue into 2019 and beyond and will allow the CPA who prepares tax returns to offer advice based on actual experience rather than an estimate of what everything will mean. This expertise allows the CPA to understand and offer more of the nuances that present creative solutions to questions that the framers of the new tax law could not answer themselves.
Approaches for Reducing Your Taxes Now and in the Future
Part of the new law includes a 20% deduction from the business income of a "pass-through" entity. The business can be a proprietorship, an LLC, LLP, partnership, or an S corporation. It can also be any other type of business entity that allows its earned income to be reported on the owner's individual tax return, as it would have passed through from the business since it does not pay taxes. Think of the advantage that this offers to the owners of these types of businesses. There is a limit on the amount of income that can be earned in total by the filers of the individual tax returns to allow the additional 20% deduction to activate.
This concept should encourage the laboratory business owner to be more creative than in the past. As an example, the laboratory owner should be more inclined to offer a 401(k) type of retirement plan to their employees. This would reduce the taxable income that would pass through to the owner from the laboratory since the contribution to the employer-sponsored 401(k) retirement plan would be a deductible item and it would reduce its taxable income.
Besides the opportunity to give the employees additional benefits at a greatly reduced cost, there is also the additional 20% deduction to think about. The implementation of an employer-sponsored retirement plan to assist the owner in taking advantage of the additional 20% deduction is only one example of what may be possible with the new tax law. With it, the implementation of an employer-sponsored qualified retirement plan—plus the additional 20% deduction of certain amounts of pass-through income—actually results in two helpful benefits, not one.
Qualifying for the Additional Pass-Through Deduction
In the event that certain conditions exist among the owners of the laboratory, and if the income is available and high enough, a more sophisticated retirement plan known as a defined-benefit plan, or cash balance plan, is also available. If the taxable income for the laboratory is expected to be inordinately higher than anticipated, an employer-sponsored defined-benefit retirement plan may be ideal for implementation at the laboratory.
This type of retirement plan typically favors the laboratory owners in the sense that much higher deductible amounts are allocated to those who are older, traditionally the shareholders of the laboratory. A defined-benefit or cash balance plan has to do with the age of those involved. The older the employee, the less time that person has until their "normal retirement date." Therefore, money must be contributed quickly so that the employee can reach his or her goal of funds in the retirement plan so that it is available at the retirement date.
In the event that the taxable income of the laboratory is so high that the normal 401(k) plan contribution does not reduce that income enough, the adoption of the defined-benefit plan may resolve that issue. The laboratory owner should study these retirement plan differences so that he or she may be able to take steps soon enough to protect their 2019 income from excessive taxes.
Other Deductions for the Laboratory Owner
As always, the astute laboratory owner is heavily invested in state-of-the-art equipment, either through leasing arrangements or outright purchases. This will continue to generate large depreciation write-offs for the laboratory. In the event that the laboratory is structured as a pass-through entity, it will qualify for the 20% additional deduction against the taxable income of the laboratory. Taking quicker depreciation may be the answer this year and next to insure that the 20% additional deduction is not lost.
Because the business is so capital intensive, it is not surprising that many laboratory owners have used their homes as collateral to acquire equipment. Now may be the time to begin using the business entity itself as collateral because of the new restriction on interest deductions and available mortgage amounts that qualify for deduction. This is an important consideration even though the loan to the business will probably be at a higher interest rate than a mortgage loan on the house. Because of the additional 20% deduction to pass-through entities, and the fact that all of the business interest is probably deductible compared to certain limits on the mortgage interest on the owner's home, it will probably be better to refinance through the business.
When all of these points are added together, especially the additional 20% deduction on pass-through entities, the new tax law certainly gives the laboratory owner a lot to digest. Additional meetings with advisors should be considered because these items are not simple. It takes someone with the expertise to design the model business plan properly for the laboratory owner so that nothing is missed. For next year, many of the items, such as the employer-sponsored qualified retirement plans, can be put into effect even at a late date.
About the Author
Bruce Bryen, CPA, CVA, is the principal in the firm of RKG Tax and Business Services, LLC, in Fort Washington, Pennsylvania.