This year the Tax Cuts and Jobs Act of 2017 should be top-of-mind for small business owners.
There were changes to both tax and pass-through deductions that may affect the daily decisions you make as a business owner. The good news is none of your standard deductions were taken away – only slight updates were made to two of the many. The iffy news is on the 20% pass-through deduction – it’s great to have, but who qualifies?
Let’s get into it.
Tax Deduction Updates
Meals and entertainment
- Entertaining clients or employees is no longer a deductible expense. The meals you purchase when entertaining are still covered, but those tickets to Hamilton are coming out of your pocket. It’s probably best to keep client or employee engagement to dining experiences only.
- If you own or lease a business automobile, or was planning on doing so, the deductible just increased. With the new tax plan, you can deduct $18,000 the first year you own a new car. If your business needs a truck or SUV, the vehicle is 100% deductible. Now is the time to get that business car, and make sure to negotiate to start off with a great price.
The Pass-Through Deduction
What does it mean?
- A pass-through business is one where tax laws ignore the separate existence of the business itself, and allows any income, deductions, credits or other provisions to pass directly through the owner instead. This doesn’t include most corporations, but does include limited liability companies, partnerships and sole proprietors.
Now if your business is a pass-through entity, the new tax law is implying that you can deduct 20%, or one fifth, of your qualified business income until it expires in 2025. To be clear, as you’ll find the law currently is not, qualified business income is the net amount (or taxable amount) of income, gain, deduction, and loss that is tied to your operating business.
What businesses/industries qualify?
- This is the biggest question that many, including tax professionals, have raised. The stipulation on exactly what type of services are excluded from the deduction is very narrow:
Health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.
The specific exclusion of the principal asset of the business being a skill of 1 or more employees is really what has America’s small businesses up in arms. Because of this – the American Institute of CPAs has written a letter to the IRS asking for immediate guidance on the entire pass-through deduction. According to the LA Times, the IRS plans on providing guidelines by June 2018.
While you wait, it’s recommended you make an appointment with a tax adviser for a date after the guideline has been provided. It’s an important time to learn what can and cannot be considered tax deductible for your business.