By Lara Piu / Photos by Kimberly Carrillo
Partridge & Associates discuss how the largest tax reform in three decades will impact your business.
For most people, reading the recently reformed tax laws is more daunting than plodding through War and Peace and more confusing than a David Lynch or Stanley Kubrick movie. The document exceeds 500 pages with addenda handwritten in the margins, and represents the largest tax reform in the U.S. since 1986. In other words, it may require some translation for business owners.
Enter Partridge & Associates CPAs PLC.
“How exactly businesses will be impacted depends,” says managing member and CPA Joy Partridge. “In many business areas, the computation will be very complex and will require ongoing accounting and planning prior to year-end to maximize your tax savings.”
In light of these changes, Partridge recommends business owners engage an advisor for a tax strategy no later than this summer. “The new codes are very comprehensive and are not always easily understood,” she warns. “Because of its complexity and difficult interpretation, we highly advise businesses to consult with a tax professional.”
Five items to review with that consultant:
- The up to 20 percent potential deduction for individual business owners. “And that’s just not a 20 percent reduction in your tax because it’s coming off the highest tax bracket,” Partridge and Associates CEO and Director Larry Workman says. “So it could be very significant, but you have to comply with the rules and it depends on if you’re qualified, so there’s a lot to do and it all has to be accounted for.”
- The new flat 21 percent income tax rate for C corporations (C-corps). “That’s a big change and a lot of people are excited about this,” Partridge says. “But you have to be making a lot of money at that level. And there are double tax implications there for a small business, so for many local businesses, it really isn’t a tax saving.”
The intention behind this change, Workman surmises, is to incentivize large corporations like General Motors to operate in the United States because historically our C-corp tax rates have not been competitive.
- Skybox tickets, golf, and business entertainment other than meals are no longer eligible for a deduction, and rather than a full deduction, half of employee meals are now eligible for a deduction, even when on-site. “To offset decreased taxes, they had to find another way to balance the budget,” Workman says.
- New options for business asset write-offs. “There are a lot of really big changes here because now there are other ways to write assets off 100 percent,” Workman says, adding, “That may sound great, but then you may be giving up part of that 20 percent deduction off the top. That’s why it’s not an easy yes or no answer to anything because one thing affects the other.”
- Revised net operating loss rules. “The prior law allowed 100 percent of the loss to be carried back two years to offset income and forward twenty years. At that point, any unused net operating losses were lost,” Workman explains. “However, the new law eliminates the entirety of the carry-back, except for farm losses, and allows an indefinite carry forward. However, it will now be limited to 80 percent of taxable income.”
For many business owners in the Airpark, Partridge notes, personal tax strategy evaluations will also be prudent this year because many businesses are set up as a flow-through. This is where qualified business income essentially flows into a personal tax return. With the exception of C-corps, flow-throughs can pertain to all business structures such as sole proprietors, limited liability corporations, partnerships, S corporations, rental activity, and real estate investment trusts. Perhaps with even more implications than business returns, some of the personal income taxes changes include:
- a larger tax bracket that will extend from 10 to 37 percent
- nearly double standard deductions, with singles at $12,000 and married couples filing jointly at $24,000
- itemized deductions that are no longer phased out based on income and personal and dependent exemptions that will not be deducted
- increased maximum child credits to $2,000 per qualifying child, with higher qualifying income limits
- non-deductible state and local taxes that exceed $10,000
- personal casualty, theft losses, and miscellaneous
- itemizations such as mileage, travel, meals, and home office that no longer apply as itemized deductions
- new home mortgage deductions that are now limited to interest on new loans up to $750,000
- elimination of home equity loans not used to purchase or substantially improve the home
- the 7.5 percent of adjusted gross medical expenses now applies to all
- cease of alimony as a deduction or reportable income for agreements started in 2019
- several gift and estate tax rules changes
- the elimination of the health insurance penalty starting in 2019
Partridge and Associates CPAs, PLC is a full-service accounting firm that specializes in small- to mid-size business. It provides tax strategy, tax preparation, profitability, consulting, tax minimization analysis, IRS and audit representation, bookkeeping, and other services. For additional information, call 480-990-2727 or visit partridgecpas.com.