It's tax time! There is so much to do to get everything done for 2017 and get ready for the new laws coming this year, and it’s never too early to plan and prepare. January is already in the books! I sat down with two tax professionals and asked them what we small business owners should be thinking about for tax planning in 2018.
Let’s Prepare for 2018
First, let me introduce Eric Levenhagen, owner and financial maestro at ProWise Financial Coaching. He is a Certified Tax Coach and a Mastery Level Profit First Professional.
Next is Randy Owens, owner of Financial Connections in Orange County CA. Randy is also a Mastery Level Profit First Professional and during his career, he has served as a banker, stockbroker and small business owner. Both of these gentlemen have been studying the new tax law and have shared their knowledge with us.
Meals and Entertainment
Cyndi: First, an easy question - what's up with meals and entertainment?
Randy: Entertainment is not deductible at all in 2018; tickets to sporting events and golf, etc. have no benefit to you from a tax perspective. Meals are all deducted at 50%. There is no difference between a meal for your team for the employer’s convenience, a meal when you travel, and a meal when you are meeting with a client. All are deducted now at 50%.
C: So to summarize, if you have an account for meals and entertainment on your books, you should split those into two accounts: 1) Meals and 2) Entertainment. This will make your preparation a little easier for taxes next year.
Business Structure: LLC or C Corp?
Cyndi: I'm hearing that different business structures may have different benefits under the new law. Should a business owner consider a change to another business structure, such as moving from LLC to a C corp, etc.?
Eric: It's still too early to tell. One of the changes is a deduction for Qualified Business Income. While the law is out, the next step is for the IRS to write the regulations. These have not been released yet. It's best to sit tight and communicate with your tax professional over the next few months to see if there is a benefit for you once the regulations come out. The Self- Employment tax didn’t change, so the existing benefit for being an S-corp is still in place.
What is Qualified Business Income?
C: The deduction for Qualified Business Income (QBI) is something that may benefit small business owners. What is Qualified Business Income under the 2017 Tax Cuts and Jobs Act?
E: QBI includes net income from sole proprietorships, net business income from partnerships (but not guaranteed payments or investment income) and net business income (but not investment income or W2wages) from S corporations.
C: What is the deduction for QBI?
E: The Act lets sole proprietorships, partnerships and S-corporations deduct up to 20% of the QBI calculated on an activity by activity basis from your taxable income for the year. There are some limitations:
- If your taxable income tops $157,500 ($315,000 for joint filers) your deduction for each activity is limited to the greater of:
- 50% of the W2 wages timely paid on behalf of the activity or
- 25% of the W2 wages plus 2.5% of the unadjusted basis
There are some other considerations for this limitation, so check with your tax preparer.
- Your QBI comes from a "specified service business" (medicine, law, accounting, actuarial science, consulting, athletics or any business that relies on the "reputation or skill of one or more employees") the deduction phases out as your taxable income rises from $157,000 - $207,500 (single filers) or $315,000-$415,000 (joint filers).
- The deduction is limited to 20% of your taxable income in any particular year. If your QBI for the year is below zero, you can carry the loss forward to the next taxable year.
C: How will this deduction get applied on my tax form?
R: First, it applies only to income tax calculations and not for self-employment tax purposes. It is NOT taken in computing adjusted gross income and it appears that it will be taken after the standard deductions or after itemized deductions.
Another thing to consider is if your business is mixed by providing service and nonservice activities. This isn’t a concern if you are under the taxable income phase-out levels. If you are above those levels, as stated in #2 above, you need to consult with your tax advisor about how to track for these different income streams. These rules are not available at this time.
How Will This New Law Impact Your Business in 2018?
From our discussion, Randy and Eric mentioned there are also considerations regarding capital gains and depreciable property, etc. We can't cover every scenario in a general blog post. Having a tax preparer help you with your scenario is the best way to ensure you are meeting the requirements of the new Act and getting the deductions allowable to you. Most of us will be connecting with our tax professional in the coming weeks. Make it a point to ask how this new law may impact your business for 2018. At bookskeep, we are not tax professionals but we strive to understand how preparing our clients’ books will make tax preparation easier.
We certainly appreciate Eric and Randy’s help in understanding what is currently known about the new tax law. This blog is for general information purposes only. Bookskeep does not provide tax advice and recommends you consult with your tax professional about your business situation.