The calendar may say that insurance agency owners have a few weeks left in 2019 to grow their businesses, but they should also be thinking about next April 15. Is there still time for agencies to lower their 2019 tax bills?
Yes, says Jon Persky of Optimum Performance Solutions, an insurance industry management consulting firm. Persky, who is both a Certified Insurance Counselor and a Certified Public Accountant, says there are a number of steps agencies can take to save on this year’s taxes.
First, they can accelerate expenses and/or delay revenue. This could include things like:
- Prepaying January’s rent
- Paying year-end bonuses in December
- Delaying billing clients
Of course, these tactics could have the effect of increasing 2020 taxable income. Expenses taken this year are unavailable next year, and revenue pushed out of this year will count toward the next.
Agencies can also make increased discretionary contributions to employee benefit plans such as 401K plans and health savings accounts. This will decrease taxable income without impacting the next year’s taxes. However, while this benefits the employees, it is an additional cost to the employer. Persky cautions that owners should take care not to exceed the maximum contributions allowed by law or to discriminate in favor of highly-compensated employees.
Agencies that are organized as Subchapter S corporations can also take advantage of the “S-corp loophole.” Persky explains that income reported on a form W-2 is subject to income, Social Security and Medicare taxes. The 12.4% Social Security tax applies only to the first $132,900 of wages. The 2.9% Medicare tax applies to all wage income.
Income reported as a distribution on form K-1 is exempt from Social Security and Medicare taxes. The only difference between W-2 income and K-1 income is how the agency reports it to the Internal Revenue Service; it is still the agency owner’s income. Persky advises reporting income up to the $132,900 Social Security ceiling as wages and considers any amount above that to be taken as a distribution. This maximizes the future Social Security benefit while minimizing the Medicare tax. On $100,000 income in excess of $132,900, the tax savings would be $2,900.
One provision of the 2017 federal tax reform law is particularly important to small agencies – the pass-through deduction. This law allows certain pass-through entities such as S corporations and limited liability corporations to deduct 20% of their income. Under IRS regulations finalized in early 2019, insurance agencies and brokerages are eligible for the deduction.
Persky notes that the deduction is limited to 50% of the agency’s payroll. An agency might consider paying staff bonuses at year-end to maximize the pass-through deduction while also reducing taxable income.
Another avenue of tax savings is capital investments. The 2017 tax law allows businesses to deduct 100% of the depreciation of newly acquired assets up-front. If an agency is planning to buy new workstations, office furniture, printers or other types of physical assets, it might make sense to make those purchases before the end of the year to take advantage of the accelerated depreciation.
Many agency owners do a lot of traveling, and they can deduct their expenses. If they have kept careful records of their driving mileage, they can deduct $0.58 per mile.
Persky says it’s also not too early to be thinking about 2020 taxes. He suggests that agency owners evaluate the tax implications related to the type of legal entity their businesses are. Sole proprietorships, he says, are the wrong way to go. While they simplify income tax reporting, “You have unlimited liability and all of your income is reported on Schedule C,” which prevents you from using the S-corp loophole.
Agency owners should discuss any potential change with a knowledgeable CPA or tax attorney. Persky advises owners to work with proactive CPA’s who will initiate contact with them, rather than waiting for the owner to ask questions. “If your CPA is not proactive,” he says, “look for a new one.”
Taxes are unavoidable and complicated. Agency owners should incorporate tax planning into their overall business plans. Year-end tax moves can pay off, but ideally, tax planning should be part of the business throughout the year.