Tag Archives: job acts

The (potential) 20% Deduction Business Owners Should Understand

Last December, one of the biggest (real news) headlines was the drastic tax reform working its way through the legislative process. The Tax Cuts and Jobs Act (TCJA) was officially signed into law by President Trump on December 22, 2017 and it represents the most comprehensive tax reform in decades.

The more dramatic changes have been well publicized, but as with much of the Internal Revenue Code, some of the logistics are hard to comprehend. Arguably the most reformative of these changes is the Section 199A Deduction for Qualified Business Income. The Qualified Business Income Deduction (QBID) exemplifies congresses intent to organically aid in the growth of business. Staying consistent with the right’s traditional nod to trickle-down economic theories, the current administration is betting that increased liquidity via tax savings will be reinvested in capital assets and hiring.

QBID is a “below the line” deduction on Form 1040 that is available to sole proprietors and recipients of pass-through income (i.e. from S-Corporations and Partnerships). It is likely that part of the initiative behind QBID was to even the playing field for businesses not operating as C-Corporations. Under the TCJA, C-Corporations now enjoy a flat 21% tax rate; with individual rates being as high as 37%, a business operating as a C-Corp could otherwise have advantages over S-Corps or Partnerships whose owner(s) reside in the top tax bracket. It seems to this author that the extension of the corporate tax break to small business owners not only fit the republican economic agenda, but it also is likely to have helped proponents of the bill increase public support amongst business owners.

To narrow the gap in tax rates between large corporations and small businesses, congress decided to allow individuals a deduction on their personal tax returns equivalent to 20% of QBI (qualified business income). Assume for purposes of an illustration that the only item on a single filer’s tax return is $150,000 of business income and that they take the standard deduction. In 2018 this nets to $138,000 of taxable income and $27,410 of tax. Now consider all things the same, except the $150,000 of business income is qualified within the confines of QBID. In the later scenario, the taxpayer’s taxable income nets to $110,400, with tax of $20,786 and a net tax savings of $6,624 because of the new deduction.

As with most tax breaks in the Internal Revenue Code, there are however caveats, and they are complicated. There is an income threshold for example: single filers with taxable income above $157,500 (or $315,000 for joint filers) will need to consider their employees’wages and the company’s depreciable assets into their QBID calculation, as their deduction will be limited by one of these two factors.

Further, a taxpayer is subject to a complete phase-out of the deduction if he or she works in one of the few service industries specified by congress “where the principal asset is the reputation or skill of one or more of its employees.” Services in the fields of health, law, accounting and consulting are a few that fall into this category. If the AGI of a professional in one of these fields exceeds $207,500 (or $415,000 if they file joint) then the QBID escapes them entirely.

There was in fact a bit of “fake news” surrounding the legislation in regards to how the Tax Cuts and Jobs Act was going to “simplify” the tax code. For some taxpayers, it probably did, the increased standard deduction will mean that many taxpayers will no longer need to itemize deductions. For other taxpayers however, specifically those who own a business, the tax environment got more complicated. The word “potential” is the best way to describe the QBID. Taxpayers whose income typically falls near the thresholds are going to have to be meticulous in how they structure things both at the entity level and on their personal returns to maximize the potential QBID. Diligent tax preparers are working with their clients to navigate the regulations and some interesting strategies are being passed around the CPA community. In the end it is going to come down to effective tax planning. Far too often taxpayers inadvertently omit deductions they would otherwise be entitled to had they planned properly. The QBID has potential to save a lot of people a lot of money, they just need to do their homework.

John Massey is a Senior Accountant at Perry, Fitts, Boulette & Fitton CPAs. He helps individuals and businesses with tax planning preparation and works on compiled and reviewed financial statements for businesses. He can be reached at 207-873-1603.

Pay Attention When You Get Paid

Over the past couple of months, it has been hard to avoid the noise coinciding with what is formally known as the Tax Cuts & Jobs Act. Now that the bill has passed, and much of that noise has become a reality, the consequences of the reform are impossible to avoid.

While the broader effects of the new legislation are yet to be seen, there are some components of the law that will have an effect on the majority of Americans within the next few weeks.

On January 11, 2018, the IRS released Notice 1036, which serves to update employers on how much federal tax they should be withholding from their employee’s paychecks. Implementation of the new withholding amounts (as adjusted for the new tax landscape) is to begin “as soon as possible, but not later than February 15th, 2018”. To put it simply, this means that many of us will see a change in our take home pay very soon.

You may recall filling out a Form W-4 when you began your employment? That form is what your employer uses to calculate the amount of federal income tax they should remit from your paycheck. Using the updated withholding tables released with Notice 1036, employers will be adjusting their employees’ paychecks to more accurately cover their (new) income tax liability.

Here is what is important to remember: while employers can accurately determine the amount of tax owed based off of the wages they pay their employees, they have no way of considering the other elements that factor into an employee’s tax situation. Taxpayers need to consider a more involved approach at determining what their overall tax liability will be. In order to do so, each of us needs to develop an understanding of the new tax laws, and applicably determine how the new laws will affect them.

Take for example, an employee who gets compensated for mileage. In the past, the compensation was likely included on the employee’s W-2, as taxable income. On their tax return, the employee would pick up the mileage compensation as part of their taxable wages, then deduct the mileage as an unreimbursed business expense on Schedule A. Now, however, as a result of the recent tax reform, that deduction for unreimbursed business expenses is no longer available; meaning that the mileage compensation will still be included as taxable income, but there will no longer be an offsetting deduction. If taxpayers aren’t proactive in making sure that they appropriately adjust their withholdings, they could potentially be in for quite a surprise when they file their tax return in April of 2019.

There has a been a lot of curiosity amongst our clients lately; many of them have been asking us how they will fare under the new tax law. It is not necessary, and it might even be unwise, to wait until you file your 2018 tax return to get your answer. The tax reform act certainly did create change. If you pay federal income tax, it will bode you well to consult your tax advisor sooner rather than later; taking a comprehensive look at your new tax environment now can help you plan ahead.

John Massey is a Senior Accountant at Perry, Fitts, Boulette & Fitton CPAs. He helps individuals and businesses with tax planning preparation and works on compiled and reviewed financial statements for businesses. He can be reached at jmassey@pfbf.com or 873-1603.

Tax Cuts & Jobs Act Is Good For Business

As I write this article, Congress is about to vote on major corporate tax reform, namely the “Tax Cuts and Jobs Act”. Supporters of the bill believe that corporate tax reform will more readily allow US corporations to keep taxable earnings in the US and that those earnings will spur new economic growth. Others protest that reform puts more money in the hands of the rich. Likely, both sides are correct. What the Act will not do, is simplify taxation for small business owners.

Clearly these tax changes will mean an increased bottom line for Corporate America. Wall Street has reacted to the anticipated change with double digit gains in many stock market indexes. And though I do not represent any of the Fortune 500 companies who will benefit most from the reform, my retirement assets are invested in those companies.

The tax cuts will undoubtedly have a significant impact on many of our local businesses as well. The final draft of the legislation gives a 20% deduction to many of those who receive business income. The Act defines trade or business income as it relates to any “qualified” trade or business of the taxpayer. For local C-Corporations, of which there are very few, the tax rate will be a flat 21%. C-Corporations with income in excess $75,000 will likely see a benefit. The more common business enterprises, such as S-Corporations, Sole Proprietors and Partnerships, will pass tax benefits along to the owners in the form of a 20% deduction on qualified business income. There are many conditions and hoops to jump through, but my reading of the bill suggests that the majority of local companies will benefit.

As an example, take the local retailer with $80,000 of income from her S-Corporation. Provided conditions are met, the $80,000 will generate a 20% deduction, or $16,000, from her taxable income. Her anticipated new tax rate will also be reduced to 22%. My estimate is that she will see an additional $3,500 in her pocket next year as a result of the business change alone. What she will do with the anticipated tax savings is anyone’s guess. Hopefully, she will spend it locally on other goods and services. Undoubtedly, she will pay a tax preparer more money to complete her tax return.

After reviewing the proposed changes, I have concluded that the majority of small businesses are likely to see tax savings. From a jobs perspective, the changes will at the very least be a major jobs act for the accounting profession. Unfortunately, Congress must have thought the same and has exempted accountants and lawyers, working in their profession, from benefiting from this deduction. Call it karma I guess.

Jamie Boulette, CPA has 30 years of tax experience and is managing director of Perry, Fitts, Boulette & Fitton CPAs with offices in Bath and Oakland. He can be reached at jboulette@pfbf.com or 371-8002.