It’s hard to believe, but it’s getting to be that time for entrepreneurs to begin thinking about how they can best maximize deductions for the rapidly approaching tax season. The 2018 tax year marks the first year that the Tax Cuts and Jobs Act (TCJA) has been in place, meaning both businesses and individuals have some different rules to consider this tax season.
Here are a few of the essential factors for both startups and entrepreneurs alike to consider before closing the books on the 2018 tax year.
For business taxes
The TCJA has led to several major tax changes for startups, perhaps most impactful being the reduced C Corporation rates. Under previous law, a corporation was subject to 15 percent (for taxable income of $0 to $50,000), 25 percent (for taxable income of $50,001 to $75,000), 34 percent (for taxable income of $75,001 to $10,000,000), and 35 percent (for taxable income over $10,000,000).
For the 2018 tax year, a flat rate of 21 percent has been placed on all corporate and personal service corporations.
The 2018 tax year creates a potential deduction for pass-through entities, including partnerships, S corporations, limited liability companies (LLC) and sole proprietors. If your business operates as a pass-through entity, the business is allowed a deduction up to 20 percent of qualified business income (QBI) of a trade or business that is not a “specified service trade or business.”
The intent of this change was to equalize the disparity between the new 21 percent corporate tax rate and the ordinary tax rates applied at the owner level on pass-through income with a top rate of 37 percent. Note that the deduction is not available to all industries and certain limitations do apply, therefore it is best to consult with your tax advisor to ensure proper compliance.
Entertainment expenses related to business activities are no longer deductible on 2018 tax returns. This includes all business-sponsored amusement, sporting events, activities, clubs, etc.
In previous years, a business was allowed 50 percent bonus depreciation for qualified property. As one of the few retroactive dates in the new tax reform bill, the new Act allows businesses to immediately expense 100 percent of qualified assets placed in service after September 27, 2017 and before January 1, 2023.
For individual taxes
In addition to deductions for their business, there are also some new items for business owners to consider when preparing their personal tax returns. For individuals, the most crucial question to come from the TCJA is whether or not you will still be itemizing deductions under the new federal tax laws. To answer that question, you will need to consider the changes to the standard deduction.
The new standard deduction has increased to $12,000 (up from $6,000) for single filers and $24,000 (up from $12,000) for married taxpayers filing jointly. Additionally, state and local tax deduction (SALT), which includes state income tax, property tax and DMV fees, is now limited to $10,000.
Expenses previously deductible as “miscellaneous expenses” are no longer deductible. Due to the increase in the standard deduction and the reduction in itemized deductions, fewer taxpayers will find a tax benefit from itemizing.
Charitable contributions are to remain deductible so long as the taxpayer’s itemized deductions exceed their standard deduction. Because of this, you may want to consider grouping two years of deductions into every other year to take advantage of the larger deduction in the current tax year.
Additionally, taxpayers may contribute long-term appreciated stock directly to the charity to take advantage of a fair market value charitable deduction for which there will be no taxes assessed on the gain.
Alternative Minimum Tax
Alternative Minimum Tax (AMT) remains in effect, however, the threshold has been increased. The increased threshold paired with the changes to individual tax deductions (SALT, miscellaneous itemized deductions, personal exemptions, etc.) will ultimately limit the number of people that would have previously been subject to AMT in the past.
As one of the largest tax reform acts in recent history, the Tax Cuts and Jobs Act has undeniably sparked commotion in the tax world, and that includes entrepreneurs. With many significant changes to both business and individual taxes, it’s best to begin preparing your startup’s 2018 tax returns as early as possible.
A certified public accountant (CPA) can help guide the process and advise what, if any, actions should take place before the end of the year to best maximize your deductions and set the stage for a successful 2019.