Tax reform was a huge event this year and will directly affect every business owner and individual taxpayer. Though it feels like we beat it to death in the early part of the year, as we get closer to year end planning time, it is definitely time to revisit the changes. The following are items of discussion you should be having with your CPA prior to year end:
Am I the correct entity structure or should I change?
We saw a lot in the press about the C Corp tax rate dropping to 21 percent and the new 20 percent deduction for flow-through entities. All business should be discussing their options and decide what structure is most beneficial to your business (now) and your succession plan (in the future). Remember to consider, and share with your advisor, your exit plan for leaving your business as this will play into your decision.
Will I get the new 20 percent deduction and how do I get the maximum benefit?
In August the IRS released additional guidance on what income qualifies for the Qualified Business Income Deduction (QBID). If you are a flow-through entity (S-Corp, partnership, LLC, sole proprietor, or trust) and your combined income with your spouse is under $315,000 (Single filer $157,500) you will get a deduction for 20 percent of your qualified business income on your individual tax return.
If your combined income is over the $315,000 threshold, you are also subject to other limitations. Doctors, Lawyers, Accountants, and other personal service businesses are not eligible to take the deduction if their income is over the limit (architects and engineers are specifically allowed to take the deduction). All other businesses’ deduction is limited to the greater of 50 percent of the W2 wages for your business, or 25 percent of your W2 wages plus 2.5 percent of the basis of certain qualified property (fixed asset purchases).
Each business must be considered separately for the deduction, though in certain circumstances it will make sense to “group” businesses together. Be sure to discuss with your tax advisor ways to optimize your deduction and plan for year end.
When reporting my long-term contracts am I using the most advantageous method for tax purposes?
If you have long-term contracts, you know that the accounting method required for tax purposes can be complex and much different than how you report on your financial statements. The new tax law has expanded options for accounting for long-term contracts to those companies with average gross receipts of $25 million or less. Certain companies will qualify to be “cash-basis” for tax purposes or might choose to report income when contracts are completed (completed contract method). The IRS has also eased the rules to change methods of accounting for tax purposes to allow for the above changes. You need to discuss the best method for your business with your tax consultant while planning for year end.
Should I be recording meals and entertainment separately in our accounting system?
CPAs like to lump certain groups of items together and “meals and entertainment” has always been one of these groups. Prior to the Tax Cuts and Jobs Act of 2017 the tax limitation for both of these categories was 50 percent. Since the new law passed, effective January 1, 2018, “entertainment” is now 100 percent non-deductible for tax. More specifically, any activity considered to be for entertainment, amusement, or recreation is to be paid for with after-tax dollars. This includes business entertainment, sky boxes or other private luxury boxes at sporting events, sporting/theatre tickets, golf trips, and entertainment facilities that include lodges and resorts. You need to separate these items from your expenses that are still deductible.
Meals for a company are still considered 50 percent deductible as a business expense only if a business meeting, negotiation or transaction occurred during the meal. Meals that used to be 100 percent deductible (employer provided to employees on or near the employer’s premises) are now 50 percent deductible. Expenses, including meals, for employee’s social or recreational activities (summer picnics) are still considered 100% deductible.
These are just a few of the items that need to be discussed with your tax advisor sooner rather than later. There are plenty of new strategies that need to be considered moving into Tax Year 2019.
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