Even the experts are having trouble navigating the effects of the tax reform. Find out how small-business owners can keep their bearings.
The first tax season where taxpayers will experience the full effect of the Tax Cuts and Jobs Act is here, and soon the economic results will be scrutinized. Business owners were a central demographic component when the bill was put together.
The idea was to incentivize small businesses, lessen their tax burden, and create growth. Whether or not this is happening is hotly contested. But, fiscal rewards aside, small-business owners should plan on taxes taking extra time and attention this year–two of the rarest commodities for busy entrepreneurs.
Below are some tips on how you can stay out of the weeds and focused on your business this tax season.
What’s New for Small-Business Owners
Corporate provisions comprised some of the most sweeping changes in the tax reform. The most critical factor in determining how your business will be taxed is the structure of your company–and which structure is best has been vastly changed by the tax reform.
For instance, the corporate tax rate for C corporations dropped to 21 percent, which is a boon to large companies but won’t have an impact on the average small business. What is big news for smaller-sized businesses is that pass-through companies can take a 20 percent business deduction.
Whether you are structured as a sole proprietorship, partnership, LLC, or S corporation, you will likely be able to take advantage of this deduction if you fall below the income thresholds ($157,500 if filing singly or $315,000 if filing jointly). However, some professional services such as legal, accounting, consulting, and several other groups are not eligible for these savings. In the end, how your company is set up makes a big difference and it may or may not be the most tax-savvy way.
If your company operates internationally, even more extensive changes are in store. For instance, the worldwide tax system is moving toward a quasi-territorial tax system, which includes a brand new repatriation tax on foreign earnings, a tax on global intangible low-taxed income, and more.
Why This Year Is So Different
If these changes sound complicated, it’s because they are. Simplifying the tax code is a complex endeavor, and the IRS is still teasing out the gray areas slowly but surely. The sheer volume of changes is overwhelming even to tax professionals who work with the Internal Revenue Code every day. The 1040 has been drastically altered, which means accountants can’t compare apples to apples anymore, and that alone stands to slow the process down.
If accountants are experiencing increased time demands due to the new regulations, you can imagine just how perplexed average taxpayers are. One study found that 28 percent don’t know what changed, and just under half of all taxpayers no longer know what tax bracket they are in. Another study found that under a third of people have updated their withholding to reflect the new tax laws. It will take a while for all of us to adjust.
This sense of overwhelm is affecting those undergoing a simple tax-filing process–to say nothing of those of us who run companies. Individual taxes are more complicated now, and that goes double for small-business owners.
What You Can Do to Mitigate the Chaos
This just might be the year to hire an accountant. Depending on how tax-minded you are, trying to keep up on the current tax regulations–let alone the regulations that are yet to come–may be more detrimental to your business.
Though you’ll save some cash on the accounting fees, the expertise an established accounting firm can offer can be worth its weight in gold. Be aware that accounting fees may be higher than typically expected because of all the extra legwork tax season requires this year.
Sometimes, a brief consulting session will do the trick if you just have a few specific questions about your situation. If you decide to go this route, reference the IRS’s resource page for how the tax reform provisions affect businesses. Other times, it’s best to leave the grunt work to the experts so that you can use your talents in the most worthwhile way: leading your company toward its next level of success.
Source: Carrie McKeegan, INC