It is not unusual for a major piece of tax legislation to leave so much uncertainty, even nearly a year after its passage. More than ever it is important to meet with your accountant to review what the 2017 Tax Cuts and Jobs Act means for you as a business owner.
Let’s take a closer look at some of the tax law changes that are meaningful for small business owners.
Tax cuts and Qualified Business Income
If you are a small business, you are likely to be a Sole Proprietor, an S-Corporation, a Partnership or a LLC. You are less likely to be structured as a C-Corporation.
When the TCJA was passed last year, the 2018 corporate tax rate for C-Corporations dropped considerably (from 35 percent to 21 percent). And, the new legislation also has given many small business owners a tax break.
Depending on the corporate structure, many small businesses are classified as pass-through-entities. So when a business structured as a pass-through entity pays taxes the profits are passed to the business owner, who then pays their business taxes on their personal tax return at the same individual rates as everyone else.
The tax break for pass-through entities is called the Qualified Business Income Deduction. According to the guidelines if your taxable income is less than $157,500 for individual taxpayers or $315,000 for married taxpayers filing jointly, then your deduction is about 20 percent of the net income of your business.
If your taxable income is higher than the set amounts, you still might receive a deduction – however, limitations and exceptions apply based on your occupation and wages. Be aware that this is a complex regulation that classifies taxable and nontaxable income and places limitations on service businesses including attorneys, accountants and health professionals.
Talk to your accountant for more information concerning your specific situation and if you qualify for the 20 percent Business Income or Bonus Depreciation deductions.
Business interest deductions
There are new limits on deducting business interest, in particular a limit of 30 percent of adjusted gross income. The gray area of this legislation is that there are many questions about what defines investment interest and business interest, and how the limit is applied to pass-through entities and consolidated groups.
These rules are quite complex, can be confusing and are unique to specific tax situations, which is why it is best to consult with a tax professional. The full effect of the legislation will not be seen until 2022. Planning for these changes should start now if it has not begun.
Business entertainment deductions are no longer allowed, this includes tickets to professional sporting events, golf outings and theater tickets. Prior to TCJA, most business meal expenses were deductible at 50 percent of the cost. In general these types of meals are deductible at 50 percent under the new law. If you do not track your non-deductible business expenses, it is best practice to keep a record of these expenses so they can be identified easily at tax time.
- Moving expenses
Not only are employees no longer allowed to deduct moving expenses for a job-related move, but employees will pay tax on any amount that the employer reimburses them for moving expenses. Why? The reimbursement of moving expenses is considered wage income – even if an employer pays the moving company or another vendor directly.
- Like-kind IRC §1031 exchanges
Deferral of gain for exchanged property is limited to real estate property. Trading of vehicles, art and other collectibles will not qualify for like-kind IRC §1031 exchanges.
- Qualified transportation fringe benefit
Deductions for expenses associated with providing any qualified transportation fringe benefits to employees are repealed except when it the benefit is necessary to ensure the safety of an employee. Employers who were providing parking and transits passes in prior years and claiming it as a business deduction might want to switch to a pretax salary reduction plan starting in 2018. Qualified transportation costs will continue to be tax-exempt to employees who pay their own costs using pretax income through an employer-sponsored salary-reduction program.
The professionals at Steven Alpinieri CPA, An Accountancy Corporation, in La Jolla offer tax planning services, and both tax and audit engagements including audits, reviews and compilations. If you would like to learn more please visit www.sandiegocpasteve.com or call the office at (858) 230-6610.