The changes in the federal tax reform law in 2018 overturned many typical tax planning strategies, but they include many money-saving deductions business owners should be utilizing.
While the outlook for next year’s tax filings is different, there is still sufficient time to make some changes or discuss critical issues with your tax advisor.
The Tax Cuts and Jobs Act (TCJA) that was passed in December 2017 altered the tax law, affecting nearly all businesses and individuals.
“Most people and businesses for that matter know a lot less about tax reform than they think,” said Dustin Stamper, managing director at Grant Thornton, a Chicago-based accounting and advisory company. “It’s important to account for hidden changes like shifts in the tax bracket thresholds or alternative minimum tax relief. These areas can actually have a bigger impact on a tax filing than one may think.”
Many of the changes to the tax law are beneficial to small and medium-sized business owners, such as allowing them to be able to immediately expense more of the cost of certain business properties, according to the IRS.
Another benefit is that companies are now able to write off most depreciable assets in the year they are placed into service, according to the IRS.
Business owners who already bought equipment in 2018 can benefit this year, while others can start planning ahead for their expenditures for the remainder of this year, said John Blake, CPA and partner with Klatzkin & Company, a Hamilton, N.J.-based accounting and advisory firm.
“Placing the asset in service will help save the business owner some tax dollars,” he said. “The Tax Cuts and Jobs Act has made many changes to the tax code that will affect business owners.”
Under the new tax law, the maximum deduction rose and is now $500,000 (section 179) to $1 million in purchases. The law also boosted the phase-out threshold from $2 million to $2.5 million. These changes apply to property that companies started utilizing in taxable years beginning after December 31, 2017.
With the passage of the law, the bonus depreciation also includes used assets. Under the prior law, businesses could only use the bonus depreciation on new assets, Blake said. The IRS law now states that the 100 percent depreciation deduction applies to depreciable business assets with a recovery period of 20 years or less, and certain other properties. Machinery, equipment, computers, appliances and furniture generally qualify, and the new law also allows expensing for certain film, television and live theatrical productions, and used qualified property with certain restrictions.
Business owners and managers should be aware of one new major change that was made to the prior tax law—the entertainment expense is no longer deductible. Under the old tax law, 50 percent of entertainment expenses were deductible. Business-related lunches and dinners with clients and vendors still qualify and are 50 percent deductible.
“It is important that business owners separate entertainment, meals and travel in order to make sure that they are getting the full deduction.”
“It is important that business owners separate entertainment, meals and travel in order to make sure that they are getting the full deduction,” said Blake.
Under the new TCJA, there is a new Qualified Business Income (QBI) deduction. The QBI is a 20 percent deduction against net income from pass-through businesses.
“There are many thresholds and restrictions to this deduction, but as a business owner, it is worth having a conversation with your tax advisor to find out how to optimize this deduction,” Blake said. “For example, a business owner may not want to take as much salary (within reason) to help optimize the deduction on S-corp income.”
Businesses that qualify for the 20 percent tax deduction for pass-through entities should consider delaying their write-offs, said Joe Wirbick, a Certified Financial Planner (CFP) and president of Sequinox, a financial planning firm based in Lancaster, Penn.
“Maybe a section 179 depreciation is not the best bet—maybe you should push off your deductions, take advantage of higher net income, grab the 20 percent deduction and, if taxes eventually go back up, you will still have deductions left to maximize at a higher bracket,” he said.
Business owners should be aware of special considerations, depending on its structure, said Michael Greenwald, partner and corporate and business tax practice leader at Friedman LLP, a New York-based accounting and advisory company.
A business owner who chose either the partnership or limited liability structure should be aware that trade or business income that flows through to them for income tax purposes is subject to self-employment taxes, he said. This applies even if the income isn’t actually distributed to the owner. The catch is that the income may not be subject to self-employment taxes if the owner is a limited partner or an LLC member whose ownership is equivalent to a limited partnership interest.
Check with your tax advisor to see if the additional 0.9 percent Medicare tax on earned income or the 3.8 percent net investment income tax (NIIT) will apply, Greenwald said. When a company is structured as an S-corporation, only the owner’s salary is subject to employment taxes and possibly the 0.9 percent Medicare tax. When a business owner or founder works at a C-corporation, again, only his or her salary is subject to employment taxes and potentially the 0.9 percent Medicare tax.
Owners need to take heed of a major issue—the IRS is focusing on companies that misclassify corporate payments to shareholder-employees, so be wary or you will wind up having to pay penalties, Greenwald advises.
Discussing these issues now with a tax advisor can save you headaches next year and also help you plan ahead for expenditures and other projects to boost growth in your business.