NEW YORK — Small business owners who don’t understand the new tax law may be in for a painful filing season next spring.
While accountants and tax attorneys always recommend owners review their finances and meet with tax professionals well before Dec. 31, it’s particularly important now due to the law enacted nearly a year ago. Owners who don’t have regular conversations with tax advisers may not understand the changes, many of which are significant and complex, says Chris Jackson, CEO of Lionshare Partners, a financial planning service.
“They look at just the brackets and think, ‘The brackets went down, by default the amount I’ll pay will go down,’ ” says Jackson.
The IRS began issuing guidelines for complying with key sections during the summer, and tax pros have helped many owners estimate this year’s tax bill. A look at some of the tax issues owners need to consider, and the benefits some are already getting:
The small business deduction
A critical question for owners of sole proprietorships, partnerships and S corporations is whether they can claim a new deduction aimed at small business owners. The law allows owners of many of these companies to deduct 20% of qualified business income. But the IRS’s guidelines set income thresholds — $157,500 for an individual and $315,000 for a married couple filing jointly. Owners with taxable income up to those amounts can take the full deduction, and a partial deduction is possible above those limits.
Should I incorporate?
The law provides for a big reduction in the corporate tax rate, to 21% from 35%. That had many owners asking tax pros whether they should convert their sole proprietorships, partnerships and S corporations to what are called C corporations to take advantage of the lower rate. Probably not, was the answer. C corporations, the structure used by the nation’s biggest companies, are taxed on their income, and their shareholders, including some small business owners, must then pay tax on dividends.
“While some people may have been thinking a C corporation may be better, the double tax part of it knocks out a lot of the opportunity for savings,” says Manuel Pravia, an accountant with MBAF in Miami.
Can I deduct that lunch?
It was clear when the law was enacted that companies could no longer deduct the cost of entertaining clients; there’d be no more breaks on theater or sports tickets or golf fees. It wasn’t clear until the IRS issued guidelines last month that money spent on food — taking clients out to dinner or bringing in meals for staffers — would still be 50% deductible.
Putting tax savings to use
Many companies that began crunching numbers immediately after the law took effect are already using their tax savings. Digital Media Solutions raised the pay of its hourly workers and renovated break rooms and other parts of the marketing company’s premises, CEO Joe Marinucci says.
“We knew what the impact was going to be and how much more cash flow we were going to have,” says Marinucci, whose company is based in Clearwater, Fla.
Paul Allen learned that the law provided a break for small producers of beer, wine and liquor: Tax on the beverages they make was slashed by 80% to $2.70 a gallon from $13.50. He factored that into the strategy for his company, Hope Springs Distillery, and
began producing gin, ab-sinthe and vodka last year.
“We decided to use the cost reduction to lower our selling prices, which has helped us to be much more competitive,” says Allen, whose company is located in Lilburn, Georgia.
Before the break, the tax was Allen’s biggest expense. By cutting his prices on his Top Hat vodka from $23 to $20 a bottle, Allen says he’s now able to better compete with national brands.