Paying Yourself When Starting a Business

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Determining how to pull money from your business is a critical step in small business ownership. Whether you take a draw or a salary, makes little difference if you are a sole proprietor. A combination of salary and draw is typically how most small businesses start. When the business is doing well, the draw can be easy to utilize, but remember that the business will need cash flow when times are leaner, so overdrawing on the business can cause issues down the road.  That’s where a controlled salary can help keep cash in the business and make it less tempting to take more cash out of the business than you really need. The owner’s draw is also taxable on the owner’s personal tax return and  owners must make estimated tax payments and self-employment taxes on any draws.

Your business type is critical.

If you are a sole proprietorship, you can take whatever amount you’d like for compensation, if the business has any money. If however, you use any other business type, the issue of compensation becomes much more complicated. If you have an S-corporation or a C-corporation, there are IRS rules regarding compensation and stock options that you need to be aware of and know the ins and outs of using. This is a great time to talk with a tax accountant about the differences and how to stay in compliance with all of the rules surrounding executive compensation limits.

 

To fully understand the salary versus draw decision, you must understand owner’s equity. When starting a business, the business owner contributes cash, equipment and other assets into the business.  Asset contributions elicit owner’s equity in the business. Accountants define equity in a simple formula:

Assets – liabilities = equity

Assets used in business include cash, equipment and inventory. Liabilities are the monies the business owes and includes bills that must be paid each month. If a business was to convert all of the company’s assets into cash and then used that cash to pay off any liabilities, any remaining dollars are considered the business’ equity. Calculating the business’ equity is a good way to determine the actual value of the business and then make a decision regarding taking a draw.

One-Third Rule

In order for your business to thrive, it’s important to remember that taking all of the profits out of the business in the form of a salary or a draw, will leave nothing for future growth or leaner times.  With that in mind, consider the one-third rule.  Take one-third of the business’ gross income and place it in a money market or business account. Take the second third of the income and use it to pay business expenses. The final third can be used to take personally or put back into the business for additional capital expenditures or growth.  This model won’t work for every business type, as businesses with greater capital outlay such as retail businesses have a much tighter margin than service related companies with smaller expenses.

Set your budgets – even in the beginning.

Get what you need to keep yourself and your family afloat. One of the leading causes of divorce is financial hardship. Bear that in mind when you go to your spouse and ask to strap the family for not just a short while, but for what could realistically turn into years. Also consider that if you carry the health insurance benefits through your salaried position now that either your spouse will need to pick up coverage, or you will have to seek other options. Sole proprietors, members of LLCs, and partners must each pay self-employment taxes on draws and any other distributions taken from the business.  S Corp shareholders do no pay self-employment taxes on distributions, but each owner who works as an employee of the company must be paid a ‘reasonable compensation’ before profits are paid.  Those employees will then pay taxes on the monies paid

 

Taxes, Man, Taxes.

Remember that no matter what kind of business entity you decide to create, Uncle Sam will always want his cut including Social Security and Medicare taxes (FICA).

Ultimately, the choice is yours, but before taking a draw or salary consider the following:

  • Business funding – Does the business have enough capital to operate sufficiently before you take the draw?
  • Taxes – Understanding tax liabilities, both for the business and personally is crucial to deciding whether to take a draw or a salary and through which type of business entity. There is no method that escapes the tax bill, so plan now for future draws and income.
  • Plan – Talk with a business tax specialist about the best ways to handle tax payments and individual liability based on your business type.

 

To learn more about tax planning and your small business, talk with a Professional Small Business Advisor by clicking Find an Accountant on this page.

 

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

The Truth About Quick Loans

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If you own a small business, you’ve no doubt seen those ads promising quick and easy small business loans, usually for large dollar amounts. Should you really take out such a loan? Before you sign the loan agreement, there are a few key steps to protect yourself and your business.

 

Do your homework. The old adage,’ if it’s too good to be true, it probably is’ should be carefully adhered to. Take the time to read the fine print – ALL of it. It’s in these tiny details where you will find all of the responsibilities, commitments, interest rates and repayment rules. Meticulously review the details for additional fees, service charges and balloon payments that can easily double or triple in short time.  Depending on how quickly the loan is repaid, there may also be additional charges for early repayment. Surprise fees can quickly add up and take your business from thriving to life support.

 

“It’s not uncommon to find different rates from lender to lender,” says Van Ballatyne, EA and owner of Counting House Associates in Greenland, NH.” Shopping around for rates and repayment options makes good financial sense,” he continues.

 

When do you need the money?

If you think you might need cash at some point in the near future, start researching and applying for a loan now while your business’ cash flow looks good. The loan process takes time, generally four to eight weeks, requiring lots of documentation regarding your business’ finances, accounts, and often, personal finances as well. Be prepared and gather all of your documents before you start the application process. Going to a lender for money when your business is financially stretched puts the odds against you for an approval. If you present your business concept with a solid business plan when things are new or going well, you have a much better chance at success.  Borrowing when you don’t need the money, means that your business will have the available operating capital to plan through the leaner times, fueling even greater growth opportunities.

 

Find a financial Sherpa.

Trying to navigate the treacherous waters of small business financing can be a ‘swim at your own risk’ endeavor. The good news is that you don’t have to go it alone. There are countless resources available to entrepreneurs to help you on your journey.  The Small Business Association (www.SBA.gov) website is a tremendous resource for loan types, grants and other information. Additionally, small business owners can talk to consultants for free advice and even request a business mentor in their community or even in their business type, who can meet with them regularly and help provide a roadmap and framework for the growing enterprise. If the entrepreneur discovers that more ongoing guidance is needed, there are lists of resources and professional services also available.

Whatever route you decide to take to finance your business, remember that you never have to make the decisions alone. A Small Business Professional Advisor is just a few clicks away, visit Find an Accountant on this page to locate one near you.

 

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

 

To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

 

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.

Small Business Week Survey Says Finances Still Top of Mind for Owners

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According to WalletHub’s national Small Business Week survey on the state of their finances, small business owners are optimistic but still report needing better access to capital. With more than 543,000 new businesses started every month, the survival rate is still threateningly low – some two-thirds will only survive into the third year.

Traditional sources of small business capital include the basics like personal assets, bank loans and friends and family. Once these are exhausted, business owners can struggle to make ends meet. The next tier of banking options can include much-needed revenue but are a bit more creative in nature.

 

Supplier financing – Small businesses can offer products that can be sold on contingency, deferred with interest and even have straight funding options.  These can provide the business with an initial offering while the business sells the items making enough profit to repay the vendor(s) and restock or increase merchandise offerings in the future.

 

Seller financing – When a business owner wants to sell but also is willing to act as the ‘bank’ in the financing deal, this is called ‘seller financing’.  The financial arrangement allows the new owner to repay the purchase price on a monthly basis over a period of time directly to the seller versus obtaining financing through a traditional lender.

 

Factoring  – When your finances are tight, another option is to sell any money owed to you in the future in your accounts receivable to a company called a ‘factor’. The factor will pay you less for your accounts receivable than it is worth down the road, but selling it will provide some immediate capital. Be cautious that this doesn’t become a regular habit as much of your profitability is lost in factoring and it is not a solid business strategy long-term.

 

Peer to Peer (P2P) Lending – A relatively new method of debt financing, these services can leverage a technology platform to operate a credit market where users can borrow and lend money without the use of a financial institution as an intermediary. P2P loans tend to be less volatile than the stock market and can offer higher returns than more conventional sources of yield. Borrowers must apply for the loan as an individual using his/her personal credit score.

 

Crowdfunding – By selling shares in the business, small business owners can grow the business with the help of their own community. Bear in mind, that crowdfunding, by its nature, requires a strong internet presence where the business owner can keep in touch with funders and apprise them of the company’s progress with their investments.

 

Competitions and Grants – Not the fastest or most reliable way to raise money, start up competitions and grants can often provide innovative ways to increase cash flow. Competitions happen throughout the year and vary by business specialty and industry. Ever popular on television with shows such as Shark Tank and even cooking shows like Food Network Star, cash infusions by offering stakes in the business or prize money can kick-start a small business with both notoriety and cash. Grants, especially Federal grants through sources like the Small Business Association, are more competitive and difficult to obtain but also a worthy prize for the victor willing to put in the work.

Whatever path is chosen should be carefully considered and the consequences weighed.  Always talk with a financial advisor or small business consultant to be sure that the options are in your best favor. To learn more, talk with a PASBA Small Business Advisor by clicking on the Find an Accountant link on this page.

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

 

To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

 

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.

The Inside Scoop on Donor Advised Funds

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Looking for a different way to donate to your favorite charity? Many investors are finding that donor advised funds are a creative way to contribute dollars while still receiving a tax deduction for their efforts.  The Donor Advised Fund (DAF) is a charitable vehicle created at a public 501(c)3 organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors who receive an immediate tax benefit while recommending grants from the fund to charities of their choice over time.  Instead of making a one-time contribution to your favorite charity, contributors of donor advised funds can either set up their own private fund or use an established DAF and then direct how the contributions are distributed.

 

A Little DAF History

Donor advised funds aren’t new; rather they originated in the 1930’s.  It wasn’t until 1969 that congress established a legal structure for them.  Thirty years later, DAFs took off increasing in popularity and today the funds account for “more than 3 percent of all charitable giving in the United States.” In fact, Fidelity Investment’s Charitable Gift Fund surpassed the United Way as the largest recipient of charitable funds in the country. According to author Helene Olin in Atlantic Monthly, “Donors put $23.27 billion in Donor Advised Funds in 2016, a 7 percent increase since 2015 and 18 percent since 2014.”

How it works:

  1. Contributions are placed into the fund.
  2. Immediate tax deductions are received by the taxpayer for the amount they have ‘donated’ into the fund.
  3. Administration of the DAF including investments (in the stock market) is ongoing.
  4. Either immediately or at some point in the future, the taxpayer makes grants to qualified charities of his/her choice from the fund.

Once the money is in the fund, the dollars cannot be returned to the donor and become the property of the ‘fund’. The underlying issue for nonprofits is the inherent delay between taxpayer donations to the fund and their eventual distribution to the nonprofit.  Appreciative recipient nonprofit organizations argue that because the funds don’t have to be released on any set time horizon, it is very difficult to determine or plan for the contributions. Additionally, because the funds are anonymous, donors can elect to remain in secret making it harder for nonprofits to thank donors and cultivate new supporters. While these are legitimate frustrations for the nonprofits, reports say that donors under age 50 are gravitating more frequently to the Donor Advised Funds. To survive with the next generation of donors, nonprofits are going to have to find a way to work with these funds and find more creative ways to market to donors and receive the funds.

 

 

Who can set up a donor advised fund?

The good news is that donor advised funds are not just for the wealthy. For funds like Charles Schwab’s Charitable fund, anyone can start a fund with as little as $5,000 in irrevocable funds and add additional contributions, if any, of as little as $500. Donors can also control how and when the funds are distributed. Funds can remain in the fund in perpetuity. Unlike charitable foundations, that must by law allocate 5 percent of their dollars annually, DAFs are not bound by the same distribution rules.  For the more affluent investor, supervised, or ‘administered’ funds can be started with a minimum of $250,000 or more and select an individual investment advisor to manage the fund. Of course, administrative and investment fees vary based on the type of account under management.

 

If you have questions about how to start a donor advised fund or financial investment strategies, talk with a PASBA Small Business Advisor.

 

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

 

To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

 

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.

Taxpayers Encouraged to Get Paycheck Check Up

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If it has been a while since you have looked at your pay stub or reviewed your tax withholding, stop what you’re doing and make a point to do it today.  Circumstances change and with the new Tax Cuts and Job Act (TCJA) in December 2017, there are even more pressing reasons to perform a quick paycheck review. According to the IRS, employers should encourage employees to use the new IRS withholding calculator at www.IRS.gov/w4app to make sure that their federal income tax withholding is in line with the changes made by TCIA.  The danger is that with the changes, employees may be unknowingly withholding too much or too little and will end up owing much more than they planned for 2018 income taxes.  The IRS has also released a set of special plain language Tax Reform Tax Tips, a You Tube video series and other special efforts to help taxpayers better understand the implications of the law.

Among the groups who should check their withholding are:

  • Two-income families.
  • People working two or more jobs or who only work for part of the year.
  • People with children who claim credits such as the Child Tax Credit.
  • People with older dependents, including children age 17 or older.
  • People who itemized deductions in 2017.
  • People with high income and more complex tax returns.
  • People with large tax refunds or large tax bills for 2017.

 

How does the calculator work?

The calculator asks questions about employment history including even partial year or short employment periods. If the taxpayer has more than one part-year job, the withholding calculator can account for this as well, whereas the paper W-4 worksheets do not distinguish between part and full year jobs.

 

Two-income families, multiple job holders

For individuals with more complex tax profiles, such as two or more incomes or multiple jobs, the risks of being under withheld is even greater. Users can even use the withholding calculator to enter income from multiple job or from two employed spouses. It can also ensure that taxpayers apply their 2018 tax deductions, adjustments and credits once rather than multiple times with different employers.

 

Plan for Different Standard Deductions

The TCJA nearly doubled standard deductions and changed several of the itemized deductions for 2018. Individuals who previously itemized deductions on their federal income tax filing may not be able itemize, but may find that they can take the standard deduction, further affecting how much tax payers may need to have withheld.  “With all of the changes this year, it is especially important for taxpayers to fully understand the financial impact on their federal withholding rather than waiting,” says Dave Flynn, owner of Flynn Accounting Solutions in Stoneham, MA. “There’s no reason to have an expensive surprise in next April’s tax filing, when a simple check at the IRS.gov website can help taxpayers correct their withholding amounts now,” he continues.

To make a change to the withholding now, taxpayers will need to complete a new Form W-4 Employee’s Withholding Allowance Certificate to their employer. Waiting until later in the year, means that there will be fewer pay periods remaining to make any necessary correction deductions before year end – which could seriously impact on each paycheck.  Taxpayers with even more complicated situations may want to reach out for guidance.

 

To learn more about tax planning, talk with a Professional Small Business Advisor by clicking Find an Accountant on this page.

 

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

 

To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

 

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.

 

 

 

Tired of Not Getting Paid?

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Freelancers have become an even larger part of the small business population since the great recession of 2009. According to a 2014 study commissioned by the Freelancers Union, some 34 percent of the total workforce is independent workers, or freelancers. That number is expected to rise to nearly 50 percent by 2020.  Many large companies who traditionally hired workers, now subcontract to freelancers, saving the company overhead for items like space, technology (computers, cell phones, printers, etc.) and benefits packages including health insurance, vacation and holiday pay. There are upsides to freelancing as well. Freelancers can set their own schedules, pick and choose projects and often experience greater creative freedom – but at a price. As more companies struggle to meet their own financial obligations, freelancers often end up on the bottom of the accounts receivable pile waiting 60 or 90 days or more to be paid.

 

Steps for improving your bottom line.

Freelancers often send an invoice and wait. While it may feel like much of the accounts payable is out of your control, there are steps you can take to improve payment frequency and the amount of dollars clients are paying you.

 

Contracts and deposits are your friends.

Rather than performing the work first and billing after completion, send a contract and initial deposit invoice prior to any work commencing. This works on many fronts. First the client will have a much clearer understanding of your relationship, when to expect work and when they will need to pay you. Secondly, there will be no doubt about the payment terms including any late payment fees, because you outlined them in the contract. Having a specific contract that covers each step of the project will also help to keep the project on time and on budget. Freelancers also face changes of scope on an almost daily basis. Instituting change orders is a great way to ensure that the scope of work and costs don’t exceed the initial project’s goals. How many times has a client stopped a project part way through making it nearly impossible to invoice for the work completed? Requesting an initial deposit, or regularly scheduled payments throughout the life of the project will help improve your cash flow while also keeping the client committed to the project. If the scope or goals do change, at least the client will understand that there is a process for that and know what to expect from you.

 

Take credit cards.

Clients may have the same cash flow issues you’re facing, but if you provide several different options for payment, odds are that you will see an increase in timely payments. Only a few years ago, credit card processing was only for larger companies, but with the advent of handheld card reading devices like Square, taking credit card payments is easy and cost-effective for any size business. Initial deposits, scheduled payments and final payments can all be set up in advance and automatically charged to your client by your accounting software, too. That way, you can spend more time working and less time processing invoices and payments.

 

Do your homework.

Consider if you were a financial lender and a client came to you to borrow money. You certainly wouldn’t give him thousands of your hard earned dollars without a contract outlining when he would pay you back. Nor would you just hand over the money without some type of credit check or personal history to ensure that he was credit worthy.  Just because you are an independent contractor shouldn’t mean that you hand over your time and talents without the same scrutiny. Taking the time to do a little homework on your clients’ credit history will prevent you from unwanted financial surprises down the road.  That doesn’t mean that surprises won’t still happen – they will.

 

Clients are business owners, too. Sometimes they need a helping hand just like you. “It’s important to consider each client individually,” says Van Ballantyne, owner of Counting House Associates in Greenland, NH.  “Personal relationships are so important for small business owners,” he continues. “You may want to sit with your client and discuss a new payment strategy to help them over a hardship. In the end, you may achieve your goal of keeping that client and saving the relationship, too.”

 

To learn more about how you can improve your bottom line and strengthen your business’ financial position, talk with a Small Business Advisor today.

 

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

 

To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

 

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.

The Impact of the Tax Cuts and Jobs Act on Your Favorite Charity

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There are many winners and losers from the recent Tax Cuts and Jobs Act passed by Congress in December 2017, and nonprofits may be one of the biggest losers. While you may still plan on contributing to your local charity in 2018 and beyond, it will be harder for you to receive the tax benefit due to an increase in the standard deduction.  While not everyone gives to charity to take a tax deduction, there will be a substantial downshift in the quantity and frequency of contributions that nonprofits may start to see. The upside is that these impacts are ‘temporary’ as a part of the TCJA and will phase out by 2025 unless extended by Congress.

 

What’s changed?

A major part of the TCJA was a simplification in tax filing. This streamlining resulted in an increase in the standard deduction from $6,350 to $12,000 for single individuals and $12,700 to $24,000 for married couples.  It is estimated that the approximate 30 percent of tax payers who currently itemize their deductions will drop to about 6 percent in 2018. That translates to a drop of between $12 billion to $20 billion in charitable giving and charitable tax deductions according to the Tax Policy Center. Less itemized deductions means less opportunity for would-be donors to take a tax deduction for their charitable giving. Nonprofits are already bracing for the financial black hole that is to come.

 

Taxpayers are thinking strategically about their charitable giving, too. The New York Times wrote recently about the option of ‘bunching’ charitable contributions. Bunching is where instead of making annual contributions to charity, tax payers would accumulate donations over several years and make them in one year’s worth of gifts in order to take the larger itemized deduction and receive the tax break. But what happens to the nonprofit that counts on a steady stream of income and now faces substantial changes to donations?  Let’s take a quick look at donor advised funds. A somewhat daunting term for what translates to donating funds privately, donor advised funds allow the contributors to donate money and take the tax deduction in the same year, but pay the money to chosen charities over a predetermined time horizon.  The donor doesn’t control the money once it’s deposited to the fund, but can direct the fund’s administrator on how they would like the dollars allocated. Additionally, certain funds have an investment component that allows the fund to potentially yield even greater profits down the road.  While donor advised funds aren’t new to the financial industry, they are gaining traction as larger national funds have affiliated with big financial firms such as Fidelity and Charles Schwab.

In addition to the increase of the standard deduction, taxpayers are also facing substantially limited deductions for state and local taxes along with home mortgage interest. In states like California, New York, and Massachusetts, where both local and state taxes are high coupled with high real estate values may mean that the tax burden will be greater and charitable giving even less.

There is a small upside to these changes. The Act calls for an increase in the amount of deduction that an individual can make from 50 percent to 60 percent of his/her adjusted gross income. The nonprofit may see a slightly larger contribution than had been seen previously. Time will tell if this greater increase in donation maximums will bear fruit for nonprofits big and small across the country.

If you have questions or still aren’t clear on what type of contributions will be deductible or what your deduction threshold is, it may be time to talk with a Small Business Advisor. You can find one in your area by clicking on the Find an Accountant link above.

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

 

To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

 

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.

 

 

 

The Tax Cuts and Jobs Act’s Impact on Small Business

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For the first time since 1986, the U.S. Congress passed major tax changes affecting both individuals and businesses across the country. The Tax Cuts and Job Act of 2017 (TCJA) has far-reaching impact for many business types and individuals.

Business Taxes

  • The corporate income tax rate is permanently lowered from 35 to 21 percent starting in January 1, 2018.
  • Pass through businesses – A new 20 percent deduction of qualifying business income from some pass-through businesses in industries such as sole proprietorships, partnerships and S Corporations will now be available. According to the Brookings Institute, pass-through businesses, those businesses who have their income ‘pass through’ to their owners, account for approximately 95 percent of U.S. businesses, while only 5 percent are C-corporations. Previously, income for pass-through businesses was charged at the highest personal tax income rate of 39.6 percent. The new law allows for 20 percent of the pass-through to be deductible while the remainder is subject to tax at the individual marginal income tax rates to a new lower maximum of 37 percent. There are exclusions including health, law, and professional services organizations except for households with taxable income below $157,500 for single filers and $315,000 for married filers. For these filers, there is a restriction to pass one of two tests:
    • 50 percent of the wages paid by the pass-through entity; or
    • 25 percent of the wages paid plus 2.5 percent of the “tangible, depreciable property used by the pass-through entity to make income. These pass-through provisions will expire at the end of 2025.
  • AMT – The TCJA eliminates the corporate alternative minimum tax (AMT) allowing for full expensing of capital investments for the next five years.
  • Craft Beverage Modernization and Tax Reform Act – Part of the larger TCJA law, this change provides excise relief in the next two calendar years of 2018 and 2019. Brewers that produce less than 2 million barrels annually will be taxed at a rate of $3.50 per barrel on the first 60,000 barrels of beer produced, and $16 per barrel on any further barrels produced up to 6 million. This change will help to provide additional capital that previously would have been sent to the government enabling additional growth and profitability. This reduction also impacts wineries and distillers.
  • Section 179 deductions- Used for expensing capital assets for small business, the deduction thresholds have been raised from $500,000 to $1 million. Odds are most small businesses won’t be able to reinvest such a large amount of $500,000 to $1 million in capital expenditures in a single year, but the offer is nice.

Personal

  • Individual tax brackets – The Tax Cuts and Jobs Act retains the current seven individual income tax brackets, but modifies both the width and tax rates. The new brackets are reduced to 10%, 12%,22%, 24%, 32%, 35% and 37% respectively. The downside is that while these tax changes are permanent for corporate tax payers, the individual tax changes are temporary, running out in 2025. Additionally, the Tax Policy Center found that “while the average household would get a big initial cut, by 2027 households in the $50,000 to $75,000 income range would see an average increase of $30 compared with today.  Secondly, the bill is expected to add $1.4 trillion to the deficit. How will this be paid?  As mentioned by Speaker of House Paul Ryan, healthcare entitlements such as Medicare, Medicaid, and Social Security are the best way to handle the growing deficit.
  • Child Tax Credit – There is an increase in the child tax credit amount to $2,000 from the current$1,000. Families making up to approximately $400,000 will get to take the credit and more of the tax credit is refundable, meaning that families that work but don’t earn enough to actually owe federal income taxes will get a check back from the government.
  • ACA Penalty – Repeal of the individual healthcare mandate penalty for not having health insurance starting in 2019. How this will play out in uninsured Americans and increased health insurance costs down the road is yet to be seen.

 

The new tax changes did not simplify the tax code, rather it is now more complicated.  To learn more or to have your specific questions answered talk with a professional small business advisor.

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

 

To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.