Experts discuss ways to find deductions before new tax law takes effect
Tri-City tax professionals are boning up on the new tax code as they prepare for the start of the 2017 tax filing season.
Signed into law just before the end of the year, the changes mark the first major reform of the tax code since the mid 1980s. It won’t take effect until 2018 taxes are filed, allowing “plenty of time to become familiar with all the new rules and regulations, and what you should be planning for when you file in 2019,” said Michelle L. Boddy, a certified public accountant with PorterKinney, PC in Richland.
Tri-City tax professionals expect many of the noticeable changes will be seen only when filing personal income taxes.
“Most of what’s in the new tax law affects individuals and not businesses. Some things in the tax law affect corporations, but most of that isn’t going to affect small business owners in our community,” said Joseph W. Crowther, certified public accountant and investment advisor representative with Christensen, King & Associates in Richland.
Crowther is encouraged by the removal of the marriage “penalty,” which happens when a couple is pushed into a higher tax bracket and has a larger tax liability, simply by becoming a household with two incomes instead of remaining single and filing separately.
Nathaniel Burt, certified public accountant and president of Burt Tax and Accounting Inc. of Kennewick, said, “typically middle-class folks will see, generally speaking, a tax decrease of close to a thousand dollars for a family,” based on the new changes taking effect with 2018’s filings.
One of the biggest changes includes a doubling of the standard deduction for married couples filing jointly, which will raise the deduction from $12,700 to $24,000. This will steer more people away from itemized returns, which could affect union members who travel to various job sites.
“They might be working out of town, paying for their own tools, using their own vehicle. And all of those expenses are totally eliminated now. So some of those folks could potentially not see a reduction in taxes, especially since the standard deduction was doubled,” Burt said.
Taking all this into consideration, what are the tax deductions most often overlooked by business owners?
One of the biggest deductions might already be in the driveway.
“The deduction for a vehicle is often overlooked as too much work, or a red flag for an audit. But all those miles add up. And now, apps are adequate for the government to provide a mileage log,” said Stacey K. Miles, tax preparer with AmeriTax & Accounting in
Richland. She personally uses an app called MileIQ, which senses when her car is in motion and geo-tags each location. When she stops, the app prompts her to record whether the miles driven were for a business need or a personal trip. She finds that by having it run in the background, it takes a lot of the guesswork out of keeping a mileage log in a spreadsheet or logbook.
“The mileage is a big one people miss by not keeping track,” Crowther said.
The use of a car falls under any “personal costs incurred to run the business that aren’t going through the business’ checking account,” Burt said. He finds these can be overlooked by business owners, “if there’s any personal use of phones or vehicles or home or storage, you want to capture those.”
Crowther doesn’t see a lot of missed opportunities by business owners. “Most businesses pick up most of their deductions. If it’s in your checkbook, they pick it up. If you wrote a check for insurance, it’s deducted. It’s those things that aren’t in your checkbook that are overlooked,” he said.
And it’s also a matter of categorizing an expense properly. “If you sponsor a nonprofit on their poster, that’s advertising. Sometimes people will put that down as a charitable contribution, whereas it’s better as a business deduction for advertising,” Crowther said.
Boddy pointed to a deduction that’s applicable to many in the construction industry, but not widely known. It’s called the domestic production activities deduction, or D-PAD.
“If you are turning something from raw materials into something that is a different product, you can get this deduction. There’s not a lot to it, besides keeping good records, and not many businesses know about it,” Boddy said. Contractors are part of those who “take raw materials and turn it into a house, producing something tangible from previous materials.”
Knowing that the tax law is changing for filing 2018 returns, Thomas M. O’Brien, certified public accountant and principal with CliftonLarsonAllen of Kennewick, advises business owners who are cash based, like farmers: “If you can decrease income in ’17 and recognize it going into ’18, if you’ve got that opportunity from a planning perspective, it’s probably the right thing to do. If you’ve got a higher income year and you can drive down that number to get that where you want it to be,” O’Brien said.
What deductions sound worthwhile on the surface, but may not be as beneficial in the end? Most experts cited the common misstep of making purchases right before the end of a calendar year as a means of lowering tax liability.
“That’s always our biggest caution and the biggest question we get every year, ‘Should I buy this?’ You have to ask yourself, ‘Is it going to make you money? Is it going to enhance your business or help you grow your business?’ Then, yes, now might be the time to do it,” Miles said. Otherwise, she cautioned that such a purchase could end up as a “paperweight” that only helped lower taxes in the short-term.
“Making a purchase to save money on your taxes is not always beneficial,” Boddy said. “You spend a thousand dollars on new equipment just to save $250 on your taxes.”
She suggested determining the reason behind the purchase before going ahead with it. “Purchasing equipment just to get a tax deduction is really not the best idea. Purchasing equipment because you will need the equipment is great. Purchasing the equipment in December because you think you’re going to need it in March is probably a good idea,” Boddy said.
This is also a case for large purchases, like vehicles, that may be used for a business a portion of the time.
“Getting the most you can out of a vehicle takes a few requirements that people are not always aware of before purchasing a vehicle. So I would suggest talking to a tax professional first, so that they buy the best vehicle to get the best number of deductions possible,” Boddy advised.
“I also think sometimes business owners just buy stuff to lower their taxes but it’s not improving their overall wealth,” Burt said. “Like some people buy big trucks or SUVs, and it’s like, is it worth having a $500 car payment for the next few years? If you’re going to buy one anyway and it makes sense to use it, that’s different.”
But for other purchases that will be worthwhile for businesses, a big change coming when filing 2018 taxes will include a revision to bonus depreciation, under section 179. The current rule allows companies, especially small businesses, to immediately expense up to $500,000 each year for equipment placed into service.
The deduction starts to phase out once a business acquires more than $2 million in property. Under the new tax law, a company can expense up to $1 million in property each year, with an increase on the phase-out to $2.5 million in new property.
“The bonus depreciation change is pretty exciting, especially for larger businesses that buy equipment, like contractors who might be buying backhoes or other large items,” Miles said. The 2018 changes also expand the kinds of property that can be expensed under section 179 to include building improvements like a new roof, heating, ventilation and air conditioning, or security systems.
While there are many deductions that can be worth the effort to document and claim, tax professionals also offered a variety of responses when asked which deduction might not be as beneficial as it seems.
The home office deduction was raised as both an oft-overlooked deduction and also as one that might not be worth the return when it comes to an investment of time.
“I’ve had a few clients that say, ‘Well, I don’t have a room designated as my home office.’ It is not always necessary to have a specific room in your house,” Boddy said.
“You just have to have a specific space. So it could be just one-half of a room that you claim.” O’Brien pointed out. “The depreciation you’re going to have on a home for a substantial number of years, it just doesn’t add up to a whole lot most of the time. And then you’ve got a piece of your house that’s now business versus personal.”
Crowther added, “While there are times it can be beneficial, there’s limitations on (the home office deduction) where there’s times it doesn’t make a lot of sense. If you’ve got such a small office in a bigger home, and you’re only allocating five percent of the entire square footage to home office expenses, it can be something that’s not worth your time.”
It may be worth your time when filing 2018 tax returns. “The new tax code is making the home office deduction a little bit more user-friendly,” Miles said. But she also cautioned, “Do you have the proper records to back-up that the home office was substantially necessary and exclusively used for your business?”
For those who do have a home office and are interested in claiming it as a deduction, they may be able to avoid the research and record-keeping needed to determine how much was spent on utilities, insurance or rent for that portion of the home.
“You can take actual expenses as a percentage as whatever space that home office takes up in your room, as far as a percentage of your house,” Boddy said. “But the IRS has also come up with a simplified method, where, if you don’t want to bother with determining all of those actual expenses, you can just take $5 per square foot.”
Burt pointed to two other deductions that have the potential to eat away at their own benefits. “There are some tax credits that are so cumbersome to use that it really takes unique circumstances to get a benefit from them,” he said. He pointed to the heavy documentation required for both the research and development credit and also the work opportunity tax credit. The latter, “is really time-consuming. By the time you pay your accountant to figure it out, it’s eliminated a lot of the benefits,” he said.
Tax professionals are cautiously optimistic about the tax law changes taking effect with 2018 returns.
“Most people will see some type of reduction in their tax,” O’Brien said. “There’s a couple windows in there that may be different as you climb up the income scale. From a business standpoint, you’re going to need to talk to someone this year, is my suggestion, just due to the pass-through deduction piece to make sure that’s calculated correctly. And make sure you’re thinking about it if you’re starting a new business.”
Burt agreed: “Not everybody’s going to get a tax cut. There’s some people who might see even tax liabilities, or possibly an increase” on 2018 returns.
Looking for those opportunities to take advantage of the lesser-known deductions when filing 2017’s tax return, or putting aside those without a great benefit, could be helpful to individuals and business owners alike.
“All legitimate deductions are beneficial because it’s going to lower your tax liability,” Miles said.