As tax season rolls around, business owners are starting to think through their tax savings strategy for the coming year. With the changes to the tax reform bill, also known as The Tax Cuts and Job Act (“TCJA”), it is important to consider how the new law will affect your tax planning strategy. The new law made a number of changes affecting business owners including creating a new tax deduction, changing the income tax rates, and adjusting entertainment expensing.
The most talked about change was the creation of a new tax deduction called the Qualified Business Income deduction (“QBI”). QBI is an up to 20% tax deduction available to pass-through entities (i.e. LLC, Partnerships, S-Corps, and Sole Proprietorships) that can be used to reduce tax liability. QBI is a below-the-line deduction and does not require itemization in order to be eligible. Calculating QBI can get fairly complex depending on the particular taxpayer. If you are a taxpayer under the taxable income threshold of $157,500 (Nonmarried) or $315,000 (Married) then QBI is calculated by multiplying taxable income minus net capital gain by twenty (20%) percent (i.e. ($150,000 – $10,000) x 20%) = $28,000). If you are over the taxable income threshold then there is a more complex calculation that factors in such things as wages paid, qualified property, and your specific trade or business.
In addition, to the QBI deduction, the tax law changed the tax rates applicable to business owners. Previously corporate taxpayers were required to pay income tax at a rate of between 15% – 39%. Going forward, corporate taxpayers will only be required to pay income tax at a flat rate of 21%. Pass-through entity taxpayers received some relief from the tax law as well. For tax years 2018 through 2026, individuals will pay income tax at a rate of between 10% – 37% instead of the max rate of 39.5%.
Finally, as business owners, it’s quite common to cultivate new relationships with current clients and prospective new clients. Sometimes those relationships are created over a shared meal, on the golf course, or at the Columbus Blue Jackets game. Under the previous law, you could potentially deduct some cost of such expense as a business expense. However, under the new tax law, expenses associated with entertainment are no longer deductible. There is an exception for shared meals but such cost should be on a separate receipt and/or itemized and are still subject to the fifty (50%) percent limitation.
With so many changes, it is important to go into the second quarter of the year with a solid plan. The new tax law provided a number of new opportunities for business owners to consider including changing the Net-Operating Loss provisions, increasing the Bonus Depreciation, and changing the Section 179 deduction. Whether you have an internal team or external tax support, it’s important to review the tax law changes and ensure that your business is benefiting from the changes.
Not sure where to start? At Robinson Legal Group Ltd., this is where we specialize. We will make sure that you are benefitting from maximum tax savings and your business is operating in a way that is compliant. Visit our website to schedule a free consultation!