As the saying goes, the only certainties in life are death and taxes. We would add that taxes are certainly complicated. The tax code for businesses can seem like an alphabet soup of regulations.
Because no two businesses are exactly alike, new changes from the 2017 Tax Cuts and Jobs Act affect each business differently. As tax filing season gets underway, it’s important to have a financial team of advisors that understand the key changes to the tax law and how it will impact your business. Gerald Iadeluca Jr., CPA, MST a Director from Citrin Cooperman, Accountants and Advisors, shared his insights regarding some major changes that businesses of all sizes should consider:
Section 199A Qualified Business Income Deduction
One of the new deductions that your business may benefit from is the Section 199A deduction.
At the risk of oversimplifying, the Section 199A deduction is a 20 percent deduction for qualified pass-through business income. Pass-through income is business income that is taxed once at the individual rates of the individual business owner, instead of through the corporate tax structure. This is not a 20 percent tax rate, but a deduction of qualifying income, which is then taxed at the 29.6 percent tax rate.
Because there are certain exclusions that preclude a business from being able to take this deduction, some types of businesses, such as manufacturing, distribution and real estate will benefit while others will not. For example, entertainers and athletes are precluded, as well as doctors, lawyers and accountants. In the healthcare sector, some services may be included as part of the qualified business income deduction, while other services such as those provided by a licensed healthcare professional in a skilled nursing facility are not eligible.
It’s best to consult with your accountant to determine eligibility and ensure you’re properly planning in order to take advantage of this deduction.
Meal and Entertainment Expense Rules
Meal and entertainment expenses were 50 percent deductible under the old tax laws. Under the Tax Cuts and Jobs Act, however, entertainment expenses, such as show and sporting event tickets or business related expenses incurred at business, social or other clubs, are no longer deductible.
Meals generally remain 50 percent deductible, but it’s important to think through how those meals are expensed and if you need to separate meal costs from entertainment costs. For example, if the meal cost is embedded in your entertainment, such as dinner included in the cost of the suite for a baseball game, the entire expense is considered entertainment and therefore not deductible.
PRO TIP: Proper Documentation Is Necessary
One of the keys to managing expenses is proper documentation in accordance with IRS rules to justify meals as business-related expenses. Keeping an accurate log of the time, date, location, business relationship to taxpayer of individuals at the meeting and business purpose of the meeting, and who participated will help you know which items are eligible for deductions. Expense tracking can certainly be a pain but is vital for all businesses, from large corporations to small mom-and-pop operations.
State Sales Tax
While there is always much ado about tax law changes at the federal level, state-level taxes can be just as complicated for businesses, if not more so, than federal tax law. One example of state level tax law that can affect your business is the collection of sales tax for online sales.
Former rules in place for sales tax were governed by physical presence, meaning that if you have a brick and mortar store or office in that state, you must collect and remit sales tax. As technology changes consumer behavior, states are beginning to catch up in order to collect revenue.
A recent June 2018 Supreme Court decision in the South Dakota v. Wayfair case upheld the concept of economic nexus. In a nutshell, this means that doing business in a state is doing business; regardless of a physical presence and that you must collect and remit sales tax. Some states have economic nexus thresholds, which establish at what point you must collect sales tax. Rhode Island’s economic nexus threshold, for example, is $100,000 in sales or 200 transactions.
As more consumers are conducting their shopping online, it’s important to consider how rules about the collection of sales tax will impact your business and discuss these implications with your advisors.
Consult With Your Accountant
While you can certainly find important tax information on the web, it’s vital to consult with an accountant to truly understand the impact of tax changes on your business.
The midst of filing season is not the best time to plan your business’ tax strategy. Talk to your accountant throughout the year to ensure you’re doing what you need to in order to get tax benefits that will help your business grow and thrive.
Develop a strategy to ensure that you can meet requirements for any deductions you’d like to take, while maximizing your profitability. Having ongoing proactive discussions will save you from being upset if something happens when your return is prepared.
PRO TIP: Get Your Records to Your Accountant Early
Because 2018 tax filings are increasingly complex, it’s necessary to get your records to your accountant as early as possible, especially if you are not planning to file for an extension. March 15 is the deadline for pass-through entities to file and it will be here before you know it. While it does take time to close books and the filing season opens in late January, it’s important to get everything wrapped up and focused on your filing documentation. Talk to your accountant about what they need to get your taxes done in an appropriate amount of time.
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