Tag: business structure

Tax Cuts and Jobs Act: Changes to Business Taxes

We continue our blog series recapping our recent presentation on the new tax laws to the Indian Valley Chamber of Commerce. This blog covers changes made to business tax laws.

One of the advantageous aspects of this new tax law is that the government has provided a clear definition of what constitutes a “small business.” A “small business” is defined as a company with average gross receipts for the past three years of $25 million or less.

This means that businesses meeting the definition of a small business can now avail themselves of these aspects of the tax law:

  • Expanded ability of cash method: This means that If you have been operating on the accrual method and consistently have higher receivables than payables, you can elect to switch to the cash method, allowing for potential consistent deferment of income.
  • Inventory tracking requirements: This allows you to elect to treat your inventory as non-incidental materials and supplies (items you expense when used or consumed). However, under the non-incidental materials and supplies category there is another election called the de minimis safe harbor election, which allows you to expense, safely and without fear of audit, anything under $2500 or less. So, if you have inventory that qualifies as non-incidental materials and supplies, and the unit cost of each item is $2500 or less, you can potentially write off your entire inventory for this year, presuming the inventory is under a year old. For example, if you are the owner of a junkyard business and have $400,000 in inventory, if you did not pay over $2500 per car, you can make these elections and have a $400,000 expense.
  • Section 263A threshold raised: This was a tax requiring that you had to capitalize indirect costs, just for tax. This is gone

Other changes include:

  • C-corporate rate is a flat 21%
  • Entertainment no longer deductible: Meals, however, are another story. Technically, right now, according to the law meals are not deductible, but in October 2018 the IRS put out a guidance that they are deductible because there was a mistake in the writing of the law. This is likely one of the technical directions that will eventually be passed by Congress. Until then, we can rely on the IRS guidance.
  • Interest deductions limited: If your gross receipts are over $25 million, your interest deductions are limited to 30% of your taxable income and any unused portion will get carried forward.
  •  Business losses, no carryback and limited to 80% of income
  • Like-Kind Exchanges now only qualify on real estate
  • Technical terminations of partnerships are eliminated

Business Change Highlights – Depreciation

Changes were also made on depreciation. Here are the highlights:

  • Additional first-year/bonus depreciation: 100% for property acquired after 9/27/17
  • Bonus now allowed for new and used property: it used to be allowed only for new property
  • Bonus on qualified improvement property no longer qualifies as written. This is another item needing correction, but the IRS has not provided any guidance to date.
  • Bonus phase-down schedule for years after 2022
  • Luxury auto limits (note that the additional $8k depreciation has been extended for 2017)
  • Increased to Sec. 179 ($1M and threshold $2.5M)
  • SUV limitation remains at $25,000
  • 179 limits are indexed for inflation
  • 179 expansion for certain real property (HVAC, roofs)
  • 179 allows for residential rental property improvements

New Employer Credit

There is a new employer credit for paid family and medical leave. This is a general business credit that employers can claim based on wages paid to qualified employees while on leave, subject to conditions.

Planning Opportunities

Please keep in mind, these tax changes are set to expire at the end of 2025. There are a number of potential savings opportunities within these tax law changes. We recommend that businesses evaluate their tax structure and engage in multi-year tax planning.

If you have any questions or concerns about these changes, please call us at 215-723-4881. You may also consult our free online 2018-19 Tax Planning, which can be found here.

To view the portions of his seminar that were broadcast via Facebook Live, please visit our Facebook page.

Tax Cuts and Jobs Act: What’s New and How Will It Affect Your 2018 Tax Return?

We recently had the pleasure of presenting a seminar on the effect of the Tax Cuts and Jobs Acts on businesses and individuals. This is the first in a series of blog posts highlighting the information covered.

While we were all focused on the changes that were coming courtesy of the new Tax Cuts and Jobs Act, a number of additional tax law revisions took effect. The following is a brief recap.

Partnership Audit Regime Laws – Federal Law

Starting January 1, 2018, this Federal Law allows tax to now be accessed at the partnership level. While this is an administrative win, it comes with hidden ramifications to the taxpayer:

  • Assessed at the highest individual rate of tax – which is currently 37%
  • The 20% 199A (flow-through) deduction is no longer applicable
  • Current partners can be assessed for deficiencies from the year prior.

As a result, we recommend that all partnerships evaluate your partnership agreements.

1099 Withholding and Filing Requirements – State (Pennsylvania) Law

These requirements also went into effect on January 1, 2018.

The 1099 Withholding Requirement means you must engage in withholding on Pennsylvania-sourced non-employee compensation to non-residents. This includes business income and leases of real estate. This withholding is currently on a volunteer basis if the entity receiving payment is receiving $5,000 or less per year.

The new filing requirements state that starting in 2018, 1099s and W2s are required to be filed electronically if you are filing 10 or more forms. However, the Pennsylvania Department of Revenue is granting a waiver for the 2018 filing period. Learn more about this requirement in one of our previous blog posts.

Wayfair Decision Affecting Revenue from Online Sources

The Wayfair Decision brings economic nexus to online transactions. “Physical nexus” is when the consumer is making a purchase from a store or transacting with a business with a physical location. With the growth of online shopping, many B2C and B2B transactions take place with companies who do not have a physical presence in Pennsylvania, but their product is coming into Pennsylvania. With the Wayfair Decision, if you are a Pennsylvania-based business conducting online sales with people or companies outside of Pennsylvania, you may have multi-state filing requirements. Most states have differing thresholds, so if you are selling one or two items in a year and do not reach their particular threshold, you would not be required to file.

As always, if you have any questions or concerns regarding these changes, please call us at 215-723-4881. You may also consult our free online 2018-19 Tax Planning, which can be found here.

To view the portions of his seminar that were broadcast via Facebook Live, please visit our Facebook page.

“Starting Your Own Business” Class with Brent Thompson, CPA CMA CGMA

Are you thinking of starting your own business? Then plan on attending the aptly-named “Starting Your Own Business” class presented by Canon Capital’s Brent Thompson as part of the Souderton Area School District’s Community Education program.

This four-hour class takes place in two, two-hour sessions 7:00 – 9:00 p.m. on Tuesday, February 26 and Thursday, February 28, 2019.

During the class, Brent will cover:

  • Business entity structures and the advantages, disadvantages, and tax ramifications of each.
  • Concepts to help your new venture be more successful.
  • An overview of financing, accounting, insurance, titled assets, home office deductions, auto mileage rules, buy/sell agreements, and more.

Bring any questions you might have to class. Cost is $30.00. Register with SACE online (from the left sidebar of the page select “Evening School,” “Life Planning & Organizing,” and then “Starting a Business.”). View the full program catalog here (Please note, the catalog shows this class as happening in two separate, two-hour sessions. It is one full course presented in the four hours of the two evening sessions.)

Should You Choose a Different Business Structure After the Tax Cuts and Jobs Act?

The Tax Cuts and Jobs Act was passed by Congress in November of 2017 but did not take effect until the beginning of this tax year (2018). It brings enough significant change to the tax code to prompt the question, “Should I choose a different structure for my business to take full advantage of this new law?” Our answer: “Yes, No, Maybe.”

Fortunately, those are the only three choices. Unfortunately, these otherwise simple choices become more complicated when associated with the tax code. As you can probably imagine, one size does not fit all when it comes to tax planning.  It never did.  And, with the Tax Cuts and Jobs Act, one size doesn’t even fit one size anymore.

For instance, if you’re a business owner whose company is structured in any way other than a C-corporation, you might be aware of the new “Qualified Business Income Deduction.” With the Qualified Business Income Deduction, you get to deduct 20% of your flow-through business income on your personal tax return and pay tax on 80% of the business income. Sounds simple, right? This section of tax law has more restrictions and limitations – we’ll call them “weeds” – than Round-Up could ever hope to control, but we’ll keep the explanation that simple to gain a general understanding.

If your business is a Sole Proprietorship with no payroll and no assets that nets $200,000 – absent of any “weeds” – you get a whopping $40,000 deduction and pay tax on only $160,000 of your net income.  Since a sole proprietorship does not differentiate between the business and the owner, the owner is entitled to take the full $200,000 “out of the business” without any tax consequences.

Ah, but now here comes a “weed.”  Corporations are required to pay salaries to the owner for the money they take out of the business. Partnerships must classify the money the owner takes out for services as “guaranteed payments.” Both salaries and guaranteed payments do not qualify for the 20% deduction mentioned above.

Therefore, if the Corporation or Partnership has the same $200,000 net annual income, and they pay a salary (Corporation) or guaranteed payment (Partnership) of $80,000, then what remains eligible for the 20% deduction is the $120,000 bottom line business income. So, a business organized as a Corporation or Partnership, doing the same exchange for services as a Sole Proprietorship, netting the same annual income, will only qualify for a $24,000 deduction. The only difference between the three? Their business entity structure.  And so, one size – each one is a business — isn’t truly one size under the Tax Cuts and Jobs Act.

By now you’re probably thinking, the best recommendation would be to structure your business as a Sole Proprietor if your business type allows for that to make sense. Yes, but, what happens when the business is even more profitable than $200,000 per year? Let’s say that in 2019, you net $500,000 (before salaries or guaranteed payments). That’s when the “weeds” really take over, and their explanation would require a dissertation, not a blog post. Take our word for it. With such an increase in income, under the Tax Cuts and Jobs Act, the Sole Proprietor, and Partnership businesses would not qualify for any deduction. And yet, an S-Corporation that is the same business, providing the same services, netting the same income, would qualify for a $62,500 deduction.

So, not only is “one size fits all” a thing of the past. “One size” isn’t even “one size” from year to year. What happens when your Sole Proprietorship profit is low one year and high the next? You can’t switch business entities each year based on projected income. So, based on the current realities of the tax code, what is the wisest move for a business owner? Absent any other information, the recommendation would be to do business as an S-Corp.

This new tax code will affect every business in the United States, regardless of size or entity structure, which is how we arrived at our initial answer to the question, “Should I change my business structure under the Tax Cuts and Jobs Act?” is “Yes. No. Maybe.”

Let’s find out what entity will be right for you. Contact us online or call 215-723-4881 to schedule a consultation.