It is that time of year again… tax season. (As a side note, I have found curling up in a fetal position and shedding a few tears is a great way to navigate the tax season.) This year I have invited my friend Jim Pursley to answer a few questions about small business taxes and what has changed over the last year. Hopefully we can all shed a few less tears next year.
Meet my friend Jim Pursley
Jim Pursley, CPA, is a partner at Hochschild, Bloom & Co. (with offices in Chesterfield and Washington, Missouri). He helps small to mid-sized businesses, as well as individuals, develop and implement strategic tax plans throughout the year to make tax season a bit less stressful. Jim has graciously agreed to spare a few minutes of his time to answer some pressing small business tax related questions for us.
Jim, what are two or three of the biggest changes business owners can expect to see this year as they file their small business tax returns?
- Most small businesses can expect to see a benefit from the new IRC 199A “pass-through” deduction allowable under the reformed tax laws.
- C Corporations can now benefit from a reduced Federal corporate income tax rate of 21%. This is exceptionally helpful for personal service corporations who previously paid a flat 35% on taxable income.
- One government takeaway is the elimination of all entertainment expenses, and some larger business will be limited on their interest expense deductions.
As you work with clients, what are some of the most common mistakes you see small business owners make when it comes to their tax planning?
If you’re starting a business, there’s an old saying “you don’t know what you don’t know.” It’s best to engage with a CPA (and attorney) before starting a business and making other important business decisions. Proper decisions early on can help you save costly mistakes later on.
A common mistake I see is that entrepreneurs will start a business without properly setting up the appropriate legal structure or not consider the tax implications involved. I strive to recommend the most tax efficient business structure that also achieves profitability and operational goals. As the business evolves, consult with your CPA and attorney about each major consideration.
Many small business owners have heard of the 20% business income deduction that went into effect for this tax year. Can you briefly describe what that is and how you are seeing it impact business tax returns?
The 20% “pass-through” deduction is very easy to explain. However it does have many nuances that can disqualify a business owner from receiving the benefit (consult with your CPA). Generally speaking, the benefit is available for any active trade or business considered to be a pass-through entity. (Partnership, S Corporation, or self-employed business)
The benefit, or deduction, is available to the individual business owner. It is not deducted on the business income tax return. The deduction is generally 20% of the net income attributable to the business and shows up as a special line item deduction on the owner’s personal 1040 tax return. There are special rules for certain businesses and also individuals who are in higher income thresholds.
Many of my clients are concerned some of their business marketing and entertainment expenses are no longer deductible. Is this true? Can you elaborate?
The good news is that there are no changes to deducting advertising or marketing expenses with the new regulations; these are still 100% deductible. However, it is true that all entertainment expenses are now non-deductible. Despite this, it is important to delineate between expenses for entertainment and for meals. Business meals are still 50% deductible, and it is important to track these expenses separately for year-end tax reporting.
What are some of the lesser known deductions that business owners should be keeping track of to lower their tax liability?
Small business owners need to be aware of expenses for professional fees, home office, and reimbursed employee expenses. All can affect their personal tax situation. Mileage rates have modestly increased from last year, and expensing of capital asset purchases has become significantly more liberal.
What’s the most important thing a business owner can do to help them prepare for next year’s tax season?
Business owners need to be proactive if they care about being tax efficient. Or to limit surprises from what they are doing, or are considering doing. As we continue to learn about and deal with the new regulations, it is crucial to be in constant contact with a trusted advisor (CPA or attorney) so that the best decisions can be made. I always enjoy fielding questions from my clients and help advise them on their journey.
Jim, thank you for your time and for sharing some of your secret sauce to our friends. If someone would like to learn more about business taxes, how can they reach you?
With the tax season upon us, it is the perfect time of the year to revisit your team of advisors. Are you getting the most out of your team? Are you taking actionable steps towards building a proactive strategy in your business? If you are just starting to build your team of advisors, or are ready to make a change, contact Welch Law to learn more about how we partner with our clients and other advisors to help you achieve your goals.
Remember the information contained in this article is not intended as tax or legal advice for your particular situation. You should contact your attorney or CPA if you have specific legal or tax related questions.