With the new tax law put in place earlier this year, everything will now be easier, right? Not so fast. In the government’s attempt to make taxes easier, many small business owners will find them to be more complicated. My goal is to give you an idea of the major changes that you should know about.
Just as an initial disclaimer, this new tax law is detailed and complicated. The items discussed within this article are at a high level to give you a general idea. If you think you may be affected by something listed here, research that topic further to see if there is more information that may limit or change depending on your specific situation.
1. Standard Deduction Nearly Doubles – New: Married Filing Jointly ($24,000) or Single ($12,000) – This will result in many tax payers no longer being able to itemize. That does not necessarily mean that taxpayers will see a tax increase. In fact, due to the higher standard deduction, many taxpayers will see a tax decrease.
2. Itemized Deductions
- State, local and property taxes can only be itemized up to $10,000
- Charitable contributions capped at 60 percent of income instead of 50 percent
- All deductions subject to the 2 percent threshold are no longer allowable. This includes: tax preparation fees, investment fees, legal fees and unreimbursed employee expenses.
NOTE: If you currently have significant work-related expenses, you paid personally but were not reimbursed for (mileage, home office, travel, etc.), you will be negatively impacted by this and should contact a professional.
3. Various Other Items
- Health care requirement – Starting in tax year 2019, taxpayers will no longer be penalized if they are not covered by health insurance.
- Moving expenses – No longer deductible except for military
- Like-kind exchanges – Now solely limited to real estate
- Alimony – For divorce agreements or renegotiations after 2018, alimony is no longer deductible by the payer nor is it income to the recipient.
- Tax brackets – Rates have been decreased for most tax brackets
This is the fun part. As a small business owner, you will likely enjoy some of the changes in the tax bill. Here are the more important items:
- Section 199A deduction – This is a new deduction that can be taken on qualified business income (QBI). This can get complicated depending on your businesses situation, so we will give a high-level breakdown, but look into this and how it affects your business specifically.
- This is for pass-through entities (Sole-Proprietor, LLC, Partnership, S-Corp)
- Taxpayers can deduct 20 percent of QBI and the deduction is taken after the AGI on taxable income.
- The deduction does not reduce self-employment tax.
- There is a phase-out that starts at $315,000 for those filing jointly ($157,500 for single filers).
- Bonus depreciation and Section 179 – Businesses can now claim 100 percent bonus depreciation on any qualified property placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The new tax law also increases the amount that can be expensed under Section 179 to $1 million.
- Entertainment expenses gone – Businesses can no longer deduct entertainment, amusement, recreation and membership dues to clubs. This is big. Taking your client to a baseball game is no longer deductible. Note that you can still pay for the entertainment through the business account; it just cannot be deducted.
- Net operating loss – NOLs are now limited to 80 percent of taxable income with the carryback period being eliminated but now with an indefinite carry forward period.
- Corporate rate – If you are operating as a C-Corp, the corporate rate is now a flat 21 percent, down from the previous 35 percent
In conclusion, the tax law has had its first major overhaul in years and not only affects individuals but business owners, too. It is important that you learn about the high-level changes that matter to you and then take those to a professional or research further the details about the change.
Note: This guidance is for informational purposes and does not constitute legal or tax advice. The author recommends that you speak with a professional regarding your specific scenario. JETRO and Associates shall not be responsible for any liability related to the guidance herein.
Mike Jesowshek, CPA, is the founder of the accounting firm JETRO and Associates. Jesowshek is also a content contributor for the Association of Fitness Studios and a supporter of SUCCEED! the AFS Business Convention & Expo. Jetro is the official accounting firm of AFS. Jesowshek has a strong passion for both fitness professionals and technology. He helps provide a digital accounting, bookkeeping, and tax solution for studio and gym owners who are looking to take it to the next level by utilizing modern, cutting edge technology.