We sat down with Cindy Hockenberry, the director of tax research and government relations at the National Association of Tax Professionals to bring you clarity on the new tax laws.
As another tax season approaches, the rules are changing for everybody, including small- and medium-sized businesses.
Last year’s federal tax reform reshaped the tax landscape. New opportunities to save on taxes now are available, and a few old tax-saving standbys have disappeared. “Small-business owners need to be aware of what those changes are, and how they may affect their business,” says Cindy Hockenberry, an enrolled agent and director of tax research and government relations at the National Association of Tax Professionals.
Hockenberry says a handful of changes are especially important:
A new 20 percent deduction on qualified business income
This new deduction essentially allows certain types of businesses that qualify as “pass-through entities” to deduct 20 percent of their income before taxes apply to their earnings.
“The idea here is that small businesses will get a tax break much the same way corporations did with the reduction in the overall corporate tax rate,” Hockenberry says.
In August, the U.S. Treasury department issued a regulation that defined exactly which types of businesses qualify for this deduction, and which do not.
“If a small business is taxed as a partnership, S corporation or operates as a sole proprietorship, they are impacted by the 20 percent qualified business deduction,” Hockenberry says.
The rules can be tricky, though. “There are income limitations and other thresholds that must be taken into account,” Hockenberry says.
For example, businesses referred to as “specified service trades or businesses” do not qualify for the deduction if their income is over certain limits, Hockenberry says. Doctor’s offices and law firms would fall into this category.
The qualifying income limits announced in August are anything below $157,500 for single tax filers and $315,000 for couples filing jointly.
Talking to an accountant is probably the best way to determine if your business qualifies for the deduction, which can put more money back in your pocket. If you have any issues and questions with regards to tax then you may want to check out some Canadian Tax Amnesty Lawyers, a professional will be able to help you with any complications that you may be having, offering you advice and support with your query. Small business queries can be answered with these professionals.
Changes to like-kind exchanges
A change in the like-kind exchange rule also might impact some small businesses. With a like-kind exchange — also known as a 1031 exchange — you can defer paying taxes when you sell property used in trade or business, investment, or rental activities, and then purchase a similar property.
However, tax reform narrowed the scope of the like-kind exchange so that now, only real property qualifies, Hockenberry says.
She says this change could negatively impact some small-business owners, such as a self-employed over-the-road trucker who wants to get rid of his aging semi.
Previously, you could trade the old truck in for a new one tax-free unless you received cash in the transaction, Hockenberry says.
“Now, you have to treat that same transaction as a sale and purchase,” she says. “This could cause a higher tax liability for some because the gain on a sale is taxable.”
Changes to depreciation and other deductions
Tax reform included a handful of changes that might impact a business’ depreciation deductions.
For example, a taxpayer who elects to expense the cost of section 179 property and deduct it in the year the property is placed into service, now enjoys an increased maximum deduction –from $500,000 previously to $1 million. The phaseout threshold also increased, from $2 million to $2.5 million.
The definition of section 179 property has expanded. For more on this and other depreciation changes, visit the IRS website.
Changes in other deductions will be relatively modest. “Small-business owners still get many of the deductions that they have in the past,” Hockenberry says.
However, she notes that there are new rules for deducting expenses related to entertaining clients.
“If a small-business owner does a lot of entertaining, they need to be aware that some of those deductions are no longer allowed,” Hockenberry says.
In short, while some meal expenses remain deductible, entertainment expenses are not. The IRS recently issued new guidelines to help businesses understand the changes. Further clarification is expected soon.
Understanding these tax changes
If you are a small business owner struggling to understand how tax reform impacts you, Hockenberry recommends seeking the advice of a professional tax preparer.
“Small-business owners need to be assured they are applying the tax law to their advantage,” she says.
Hockenberry says getting on top of the new tax laws requires small-business owners to start now so they have the time to get the most out of their tax returns in the spring.
“The rules are complicated and not getting simpler any time soon,” she says.
So, be sure to sit with your accountant before tax time to discuss these important changes. Doing so can help you keep more of your profits in your own pocket – and out of Uncle Sam’s clutches.
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