Although business owners were anxious to see how the tax code overhaul affected their bottom line in 2018, many are scratching their heads as regulations fall into place.
“I’ve put in enough hours at this point it feels as though I’m getting ready to take another CPA exam,” said Ty Schatz, a certified public accountant with Michels & Schilperoort P.S. in Sunnyside.
The IRS still has several forms that are not finalized, said Schatz, who said he wouldn’t be surprised if there’s a delay in the ability to file tax returns this year, especially with the partial government shutdown.
“We do not have court cases or final regulations as of yet to rely on, so our interpretations of the law have sparked a lot of conversations among professionals,” said Schatz, who noted for example that the mortgage insurance deduction was reinstated in late February, causing affected taxpayers to amend their already filed returns to reflect the change. “We could see similar things happen this year with so many changes taking effect.”
Overall, he said, most of the tax adjustments have been beneficial to business owners.
Chris Porter, a partner at Richland’s PorterKinney PC, agreed.
“Almost all of us will pay less in taxes in 2018. While it’s true rich payers will pay lower taxes, across the board the vast majority will pay less. It’s not political, it’s math,” Porter said.
Personal exemptions have been eliminated, but a higher standard deduction has been put in its place. Businesses large and small also will see changes, as the tax code includes lowering the C-Corp tax rate for larger businesses from 35 percent to 21 percent. Small business owners, such as sole proprietorships, S-Corps and partnerships, will benefit from a pass-through deduction of 20 percent.
“So, if a business owner makes $100,000 a year, they can basically deduct $20,000 and only pay taxes on $80,000,” Porter said.
One primary factor to determine if a small business qualifies is income. High-income business owners will have limitations, Porter said. Single individuals, for instance, making $157,500 or less can generally take the deduction in full, while married couples making $315,000 can qualify.
“There’s a complicated list of limitations that set in when income exceeds those thresholds,” Porter said.
Among other changes, marginal tax rates were lowered for anyone who receives a W2, but they also apply to owners of pass-through businesses as that income is passed through to the owner’s individual income and taxes.
There are seven tax rates, and almost all of them have been cut. The 15 percent tax rate—which applies to married couples with annual taxable income of $19,050 to $77,400, has been reduced to 12 percent.
A change that could provide a significant benefit for businesses is the increase in the threshold at which point businesses have to switch from the cash-basis accounting method for tax purposes to the accrual method.
“For the most part now, companies can elect to utilize the cash basis method when it has average gross receipts under $25 million. This could allow many businesses to move back to the cash basis, which could provide some tax benefits,” Schatz said. “Additionally, with that threshold, companies holding inventory may have an opportunity to adjust how costs are applied to those inventories leading to the ability to be more aggressive in expensing items rather than having to inventory the cost and delay recognition of those expenses.”
State and Local Tax, or SALT, deductions were without limitation in 2017, said Porter, but starting in 2018, the IRS imposed a $10,000 cap per tax return. Washington taxpayers typically don’t pay as much as higher-tax states such as California and Oregon. However, if taxpayers buy a vehicle or remodel a home, they might exceed the cap, in which case they will not realize the full value of the deduction as they would have in the past.
But while SALT deductions were reduced, the amount of property a business can expense under section 179 increased from $500,000 to $1 million under the 2017 law.
“When you buy a large piece of equipment — a track hoe for instance — you have to spread out the cost over a number of years because the equipment is going to continue to provide value for you year after year,” Porter said. “The government said, ‘How about you write that off over so many years, depending on the equipment. With the 179 deduction, the tax code allows you to write off 100 percent of the purchase if it qualifies in the first year. Under the new tax law, now you can write off 100 percent of the cost of $1 million worth of equipment if you qualify.”
Starting in 2019, the health care tax penalty will be eliminated and the penalty will not be collected from 2020 returns. And while that might not apply to employees receiving health care through their employer, some unreimbursed employee expenses got the ax under the new tax code. Therefore, if people receiving a W2 drive their car for work or have travel expenses — which is common for sales people — those expenses would have been itemized deductions in the past. Under the new law, that’s not allowed.
“People are panicking and I’m getting phone calls,” Porter said. “You can deduct those expenses if you’re a business owner, but not if you’re an employee. That may cause some people to want to be reclassified as an independent contractor because then they can still deduct. But an employee cannot. If you receive a 1099, keep clocking those miles.”
Porter said one of the strategies here is to move those deductions to the business owner’s side. If an employer has an employee incurring those kind of expenses, he suggests looking at moving those expenses to the company’s side to take advantage of the deduction.
Because the tax code is constantly changing, Porter suggests business owners and individuals meet with their CPA regularly, especially toward the end of the year to maximize deductions and take advantage of tax benefits.
“Even if you’re selling Mary Kay, it would likely benefit you to hire someone to do your taxes than to do them yourself,” said Porter, who added that tax preparation is a write-off for business owners. “Now more than ever, hiring a competent tax accountant is important.”
“I think it’s important to stay vigilant when it comes to tax planning and should be considered throughout the year, not just December,” added Schatz. “This provides the best opportunity to make good business decisions that will be in the benefit of the business, not just from a tax standpoint, but an economic and cash flow standpoint as well.”
Porter suggests looking at professional credentials, such as CPA or enrolled agent. Secondly, read online reviews and research their experience.
“People will buy a $30 purchase on Amazon and read reviews for an hour, but they’ll go to anyone for taxes,” Porter said.
Many firms, including PorterKinney and Michels & Schilperoort, offer free consultations so potential clients can ask questions.
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