Tax professionals say helping small-business owners make the best decisions for their tax returns is harder than ever this year. That’s not because of changes to the tax code in 2017, but rather potential changes in 2018 if a new tax bill is approved by Congress and signed by President Donald Trump.
New tax laws could help business owners, both large and small, but the immediate quandary comes in trying to predict the future — and plan accordingly.
“It’s really complicated this year,” said Tad Goodenbour, partner at BKD accounting firm. “There aren’t a lot of changes for 2017. The problem is using a crystal ball for ’18. We have to either assume [a tax bill] will pass or assume it won’t, and make the best decisions for each client. There is more uncertainty this year.”
Both the Senate and the House of Representatives authored bills — only the House bill has passed a vote — and they’d like to hammer out a version that is mutually agreed upon by year’s end. The Senate proposal was a work in progress at press time, as changes could be made to help convince Senators to vote for the bill.
Some deductions for businesses would likely be eliminated — such as certain entertainment-related expenses — while others would increase, such as the Section 179 deduction, which currently allows expensing of business equipment purchases and certain qualified real property up to $500,000; the House bill would raise that limit to $5 million and the Senate version to $1 million.
Bonus depreciation for new equipment is at 50 percent this year, and scheduled to decrease to 40 percent for 2018 and 30 percent for 2019 before being eliminated, Goodenbour said. Under both the House and Senate proposals, with certain narrow exceptions, 100 percent of the cost could be expensed in the year of acquisition. Another important change would be that the equipment does not have to be new; used equipment would generally qualify.
“Generally viewed as a negative provision in both proposals is the elimination of Section 1031 tax free exchanges for all property except real estate,” Goodenbour said. “Given the ability to expense 100 percent of equipment additions, the effect of the 1031 repeal would be somewhat muted.”
Both bills would lower the corporate tax rate from 35 percent to 20 percent, although the current Senate version wouldn’t take effect until 2019. The owners of LLCs, partnerships and S-corporations (pass-through entities) would generally see lower rates under either proposal. The two proposals differ significantly, however, Goodenbour said. The Senate proposal gets to a lower rate by giving a deduction to the owners of 17.4 percent of the pass-through income reported by the owners on their return. The House bill is more complicated, and stipulates that the rate on qualified pass-through income will not be more than 25 percent.
“The complexity lies in what is defined as qualified pass-through income,” Goodenbour said. “The bill differentiates between an owner that is active in the business and one that is not. An owner that is not active would receive the benefit of the 25 percent rate on all of the pass-through business income taxed on his or her return while an owner that is active would only receive the benefit of the 25 percent rate on 30 percent of the pass-through business income. One concession for the active owner is that 30 percent of their salary would be subject to the maximum rate of 25 percent as well.”
As the calendar turns to December, business owners and their accountants must make decisions.
“It’s vital to do your planning now. After the first of the year, it’s too late,” said Jordan Empey, a tax partner with Stockman Kast Ryan + Co. “Tax Planning 101 is all about deferred income and accelerated deductions.”
Marvin Strait, a certified public accountant in the Springs who also provides litigation support, agrees that timing is significant.
“Do you take the deduction this year or next year?” he said. “What does your income look like this year and next year? Every situation could be different, and there is some room to move income or deductions around. Where do you get the best bang for your buck?”
But should a business owner sell that piece of land or buy that new piece of equipment this year and claim the income or take the tax deduction — or wait until 2018? That’s where uncertainty comes into play more than usual.
“My main tip is to just run your business,” Goodenbour said. “You can’t make every decision based on taxes, or you’ll drive yourself nuts. Manage your business, not your taxes.”
Judy Kaltenbacher, the tax partner in charge at Stockman Kast Ryan + Co., expects a new tax bill to be passed for next year and said it would bring the biggest changes since 1986. It’s one reason some business owners might defer sales until January if they want to defer that income, she said.
And if a bill passes that would drop tax rates dramatically for pass-through business owners, that would make planning before year-end even more important, Empey said.
“If tax reform were to pass for tax year 2018, most people would benefit from pushing income [to 2018] and moving deductions to ’17,” he said. “That sounds overly simplistic, but it’s the overall idea.”
Each business owner must look at their individual circumstance, Strait said.
“There are a lot of things to do to move money around,” he said. “Most C-corps are paying about 20 percent now with their deductions and the breaks with stock options they give to companies. It’s like when you go to a new car showroom, how many people pay the sticker price? Nobody pays it and they don’t expect you to. Well, no corporation pays 35 percent.”
He said small-business owners have methods to lower their tax rate also, such as contributing to a qualifying charity located in an enterprise zone, where they get a 25 percent state tax credit.
Trump’s intention is to lower taxes and also simplify the tax code. Strait said half might get accomplished.
“Those were the goals,” he said. “Well, what they’re talking about is not simplifying.”
Goodenbour said each house of Congress produced a bill that is about 450 pages long.
“And these are just amendments to the [tax] code,” he said.
That’s where a tax professional can benefit a business owner.
“In complexity lies opportunity,” Goodenbour said.
For the small-business owner who has been doing their own taxes, or may be using a relative to help them file, Empey said it might not be too late to consult a professional.
“You have three years to amend a tax return, so I’d advise anybody in that situation to get a consultation,” he said. “A lot of people don’t realize they have issues, but a professional can find enough savings to make it worthwhile for what you have to pay them.”
TIPS FOR SMALL BUSINESSES
• Hire a tax professional: Most business owners are great at running certain aspects of their business, but few are well versed in tax law.
“A lot of small business owners are successful because of the passion they have for their business,” said Stockman Kast Ryan + Co. Tax Partner in Charge Judy Kaltenbacher. “Dealing with the financial side is not their specialty. They need a trusted adviser. If they choose not to, I think they’re going to regret not having a professional; it may not be immediately, but it’ll catch up to them.”
• Be nimble: There aren’t many working days left for Congress in 2017, but federal lawmakers could try to push through a tax bill before the calendar rolls over to 2018. That means business owners should stay aware of what’s happening in Washington, D.C. “This year, more than any other, you have to stay nimble and be ready to adapt,” said Tad Goodenbour, partner at BKD accounting firm.
• Check with an adviser: Tax professionals say it’s always important for business owners to stay in contact with their accountants regarding changes in the law and decisions they are making that could affect their tax returns, but especially this year with possible changes coming in 2018.
• Stay informed: Read trade and industry publications that are relevant to your business, along with national news that could affect your taxes.
“Your tax professional will keep up with changes,” Goodenbour said, “but it’s always good for the business owner to be informed also.”
• Tax season is year-round: Increase options by thinking about tax savings throughout the year. “People just need to be thinking,” said Jordan Empey, a tax partner with Stockman Kast Ryan + Co. “Getting advice before making a major business decision can save them money later and make the process less complicated.”