2018 Tax Law Changes for Businesses: Understanding the Tax Cuts and Jobs Act

Understanding the Tax Cuts and Jobs Act For All Businesses

Here are some highlights of changes (tax cuts and Jobs Act) that affect all business entities: Read more

  • 100% bonus deduction for assets placed in service after September 27th, 2017.  The old law only allowed 50% deduction.
  • Old law only allowed you to take bonus depreciation on new assets.  The new law allows used property to qualify.
  • Deduction for energy efficient commercial buildings.
  • Credit for renewable diesel fuel.
  • Old law allowed businesses to carry back a loss 2 years and carry forward the loss 20 years.  The new law eliminates the 2-year carryback, but allows you to carry the loss forward indefinitely!
  • If a business pays out money for sexual harassment and there is a non-disclosure agreement, there is no deduction for the payout.  If no non-disclosure agreement exists, then the payout is deductible.
  • New credit for employers that provide family leave in 2018 and 2019.  A company must pay more than 50% of the employee’s historical wages to receive the credit
  • Transportation fringe benefit expenses are revoked (parking/mass transit), but excluding it from the employee’s income is retained.
  • Luxury auto deductions tripled by allowing a deduction of $10k in the first year, $16k in the second year, $9600 in the third year and $5760 in the fourth and later years.  Maximum bonus depreciation is $8000.
  • Old law required companies earning over $5 million to file on the accrual basis.  New law says that companies under $25 million can file on a cash basis.

 

Meals & Entertainment

It was a surprise to many businesses that the new law does not allow entertainment expenses.  This would include golf outings, ball games, movies, theatre, etc.  The good news is that meals with clients are still 50% deductible, including meals while you travel.  Be aware though, if you go to the ball game and have a meal, there is no deduction for the meal while participating in entertainment.

The old law allowed a 100% deduction for meals provided to all employees when there was a company meeting during a meal break.  This has changed to be 50% deductible.

Holiday parties, company picnics, and employee appreciation remain at 100% deductible.

C-corporations

The old law taxed corporations between 15% to 35%.  In fact, personal service corporations, like accountants, attorneys, architects, were taxed at a flat rate of 35%.  The new law says that all corporations will be taxed at a 21% rate.  This is fantastic for those personal service corporations, but businesses that were taxed at 15% may want to look at the options of switching their entity to pay less in tax.  Corporations that have less than $87,100 of income will end up paying more in taxes.

The good news is that the alternative minimum tax (AMT) for corporations is eliminated!

Partnerships

Prior to the new law, the rule was that if a partnership sold more than 50% of the ownership, the partnership was automatically terminated.  The new rule eliminates this rule.

Consult your attorney because partnerships will want to make sure that it is documented on who the partnership representative is.  If there is no written representative, the IRS may assign someone and you could lose rights and control.

That’s just a quick look at some of the changes affecting businesses.  If there ever was a year to do some business tax planning, this year is it. Contact us to find out more.

 

Setting Up Products and Services

The products and services your business sells make it unique. The same thing is true of how these items are set up in your accounting software.  Whether you’re using QuickBooks Online or something else, getting your products and services set up right can impact the quality of the information you can get out of your accounting system.  Read more

Here are the types of items you can set up in most systems.

Inventory item

Inventory items are used in retail and wholesale businesses. They are physical items that the system can keep count of for you.  You can purchase or make the items, and the associated cost is usually tracked when a shipping receipt or bill is entered.  They are sold when a sale is made and an invoice or sales receipt is entered.

Transactions using inventory items impact a lot of accounts on both the balance sheet (cash, accounts payable, accounts receivable, and inventory) as well as the income statement (cost of goods sold, sales, and returns).  The inventory item can be tied to default sales and purchase accounts in most systems.

Non-inventory item

QuickBooks offers a type of item called a non-inventory item. There’s a big difference in that non-inventory items do not have quantities associated with them. They don’t increase or decrease the inventory account. But they are able to be tied to default sales and purchase accounts like inventory items above.

Examples of non-inventory items include items purchased for a specific jobs, such as a contractor purchasing appliances for a custom home, items you sell but do not buy, such as an ebook or other digital product, and items you purchase but do not sell, such as shopping bags.

Service item

A service item is a special type of non-inventory item. There are no quantities, which makes sense because services are not physical items. They also are only connected to a sales account and not a purchase account.

With service items, you could set up service packages or hourly rates.

Bundle

A bundled item is a group of items that were designed to be sold together. For example, if you sell a gift basket of coffee products, you would bundle the items used to create the basket.

Assembly Item

An assembly item is a special type of inventory item where the quantity is tracked, but it differs from an inventory item in that it can’t be sold separately because it is a component and not a whole item.  Assembly items are available in larger accounting and inventory apps, such as QuickBooks Enterprise, and are used in conjunction with a Bill of Materials or other build feature.

An example is a set of shelves. The assembly components are the individual shelves and the frame pieces that you may want to keep counts of. An inventory item that contains the shelves, the frames, and other parts is “built” from the assembly items.  The nuts and bolts could be non-inventory items or assembly items, depending on whether you want to keep count of them or not.

Sales Tax

Sales tax is a very special type of item used on an invoice or sales receipt to calculate sales tax due on the order. In many accounting systems, it’s usually kept in a separate list from the other product and service items. Rates can be entered for each sales tax jurisdiction.

Other

Some systems have an “other” category to capture items such as freight, shipping, handling, and other add-ons to the sale.

Tracking Profitability

Setting up the right type of products and services is critical to matching costs and revenue. This section of your accounting system is also the one that’s most different from industry to industry and company to company. Be sure you get professional help from experts who know both the software and your industry for best results.

2018 Tax Law Changes: Understanding the Tax Cuts and Jobs Act

tax changesIn this article, we’ll share some of the highlights of the tax changes for 2018 as they relate to individuals. Use this as a type of checklist, and feel free to contact us on any point so we can provide additional details as to how it might impact your situation.  Read more

Tax Bracket Reorganization

There will continue to be seven tax brackets, but the rates and thresholds have changed:

  1. 10% rate for individuals making up to $9,525 or married filing joint up to $19,050
  2. 12% rate for individuals making between $9,526 to $38,700 or married filing joint from $19,051 to $77,400
  3. 22% rate for individuals making between $38,701 to $82,500 or married filing joint from $77,401 to $165,000
  4. 24% rate for individuals making between $82,501 to $157,500 or married filing joint from $165,001 to $315,000
  5. 32% rate for individuals making between $157,501 to $200,000 or married filing joint from $315,001 to $400,000
  6. 35% rate for individuals making between $200,001 to $500,000 or married filing joint from $400,001 to $600,000
  7. 37% rate for individuals making over $500,000 or married filing joint over $600,000

Above the Line Deductions

Moving deductions and reimbursements—suspended through 2025 except for military service members who are changing duty stations.  Employer reimbursements (other than military) will be included as taxable wages

Alimony

For agreements or modifications entered into after 12/31/18, alimony will no longer be deductible by the payer, nor will it count as income to the recipient.  For a pre-2019 divorce, the old rules apply (payer can deduct payments and the recipient must pay taxes on them.  The law does permit ex-spouses to modify an earlier divorce agreement to adopt the new rule after it goes into effect in 2019, but both spouses would need to agree to the change

Educator expenses

There is no change to the law where a teacher is allowed to deduct up to $250 paid out of pocket for classroom supplies and professional development courses

Dependent care

There is no change to the law.  An employee can exclude up to $5000 per year from their gross income to provide for dependent care assistance.

Education Provisions

All education provisions remain the same for the following:

  • American Opportunity Credit
  • Lifetime Learning Credit
  • Coverdell Education accounts
  • Higher Education interest
  • Employer provided education assistance
  • Exclusion of qualified tuition reduction
  • Exclusion for interest on US savings bonds used for higher education expenses

The only exception is the 529 plan, which now allows for the tax-free withdraw of funds if used for qualifying expenses for K-12 private and religious schools.

Tax Credits and Exemptions

Exemptions

The $4050 exemption per person (taxpayer, spouse, dependents) has been suspended, but don’t panic because the standard deduction has increased to offset this change

The Child Tax Credit

Expanded to $2000 per child under the age of 17 because of this more taxpayers will qualify for this deduction, as the phase out now begins at $200,000 AGI for single filers or $400,000 for MFJ filers

Non-Child Dependent Credit

Allows for a $500 credit per non-child dependent but the same income phase out as the Child Tax Credit applies

Electric Vehicle Credit

Credit has been retained and continues to be a maximum credit of $7,500

Adoption Credit

Credit has been retained and continues to apply to an adopted child under the age of 18, with a maximum credit of $13,570

Alternative Minimum Tax

While AMT was retained, the exemption phase out has increased substantially.  Old tax laws were $160,900 for Married Filing Joint, $80,450 Married Filing Separate, $120,700 single or Head of Household filers.  NEW laws are $1 Million for Married Filing Joint, and $500,000 for all others

Standard Deduction and Itemized Deductions

Standard deduction has nearly doubled:

  • Single filers = $12,000 deduction (up from $6,350)
  • Head of Household filers = $18,000 (up from $9,350)
  • Married Filing Joint = $24,000 (up from $12,700)

Itemized Deductions

Medical deduction has been retained and improved

For 2018, the threshold for deductibility is now 7.5% of Adjusted Gross Income (used to be 10% of AGI)

Itemized deduction phase out

The deduction limitation phase out for higher income taxpayers has been suspended

SALT (State and Local Tax) deduction

The SALT deduction has been capped at $10,000.  This is a combined total of your property taxes + state/local taxes + DMV fees.  In the past, the deduction was not limited

Mortgage interest deduction

Full interest deduction allowed for up to $750,000 of indebtedness on primary/secondary home mortgage.  For loans originated prior to 12/15/17, mortgage indebtedness can be as much as $1 million to qualify for full interest deduction.  Home equity (includes second mortgages) mortgage interest can still be deducted so long as funds from the equity loan was used to buy, build, or substantially improve the home that secures the loan.  The total of all loans must not exceed $750,000 ($1 million for loans originated prior to 12/15/17)

Charitable contributions

The deduction amount has increased, but charitable contributions cannot exceed 60% of a taxpayer’s AGI (up from 50%)

Miscellaneous deductions (subject to 2% of AGI)

Miscellaneous deductions have been suspended through 2025.  Some examples of these types of deductions are unreimbursed employee business expenses, union dues, tax prep fees, investment expenses, casualty losses

Affordable Care Act

The shared responsibility payment (penalty for not having health insurance) has been repealed and will go into effect in 2019

Do any of these impact you? If so, feel free to reach out so we can do some tax planning to avoid surprises in April 2019.

5 Tips on Bringing Home the Bacon

baconWhether you call it bacon, Benjamins, or big bucks, cash – and having enough of it – is key to running your business.  Here are five tips related to managing and getting the most out of your business cash.

  • All banks are not the same.

Choose your bank wisely, and don’t be afraid to switch if you need to.  Banks know they have a “high switching cost,” which means it’s one big time-consuming hassle for customers to change banks. Read more

A couple of things that are important when choosing banks (some of which we never knew to ask five years ago) include:

  • Is your accountant able to connect your accounting system with free bank feeds, saving you hours and hours of accounting work?
  • How automated is your bank? The more automated, the fewer errors, and the more likely the bank is to have competitive services, features and prices.
  • What is their policy on holding large deposits?
  • Do they offer ACH services?
  • Does your payroll withdrawal need to be approved each pay period?

Accountants have experience with banks, so if you are in the market for a new one, feel free to reach out and ask us our opinion on the easiest bank to work with.

  • Keep the number of cash accounts to a functional minimum.

Certainly, you’ll need at least a business checking account, often a business savings account, a business PayPal account, and perhaps a petty cash fund.  You may also want a separate account for payroll; a lot of companies do. But if you need more accounts, there should be a functional business reason to support them. That’s already a lot of accounts to reconcile and keep track of each month.

The same is true of credit card accounts.  It’s the keep-it-simple approach.

  • Reconcile all of your cash accounts every month.

Keeping all of your cash accounts reconciled each month is a good idea. If a bank error, accounting mistake, or even fraud occurs, you can catch it and get it resolved more quickly than if you delay.

You’ll also have more accurate information about your balances and can move and manage your money better.

As you learn your balances each month, you can also move money around.  Unless you spend a lot out of PayPal, plan to move that money to pay off debt or into your checking account on a regular basis.

  • Maintain a cushion in your checking account.

If your checking account hovers close to zero more often than not, you may be wasting precious time watching your bank balance instead of spending time to manage your business.  If you make a small error, you may get hit with costly overdraft fees, making your cash situation even worse.

Instead, consider depositing a fixed amount, like a cushion, that you never spend. You won’t get overdraft fees, and you won’t have to watch your balance so closely.  You may give up some interest income, but the time freed up and the reduced worry will be worth a few extra pennies.

  • Watch your liquidity.

Cash is to business as water is to people; we can’t live without it.  Make sure you have enough to cover future obligations, and when possible, build up several months of reserve for emergencies. Anything that you can liquidate quickly, such as accounts receivable, can count toward this fund too.

Try these five cash flow tips to keep bringing home the bacon in your business.

Let P.T. Anderson help you manage your books and let you focus on doing what you do best for your business.

Is Your Business Considered a Hobby by the IRS?

Very frequently tax preparers are asked to provide clarification on IRS rules that they heard from a friend, neighbor or colleague. Usually some part of the statement is true; however, there is always more to the story or it may not apply to that person’s specific situation.  If you’ve heard the statement, “You can’t deduct a loss from business if it occurs more than three out of five years,” this is not the entire truth. Read more

Guidelines

A person that conducts an activity for profit is allowed to deduct the expenses that are ordinary and necessary in that industry. If the expenses exceed the income, the amount can offset other income such as wages, interest, or dividends. However, if your activity is a hobby, you cannot reduce your other income by the losses.

When your losses exceed the three-year rule, the burden of proof now shifts to the taxpayer to prove the activity is a for-profit business. Here are some factors to consider:

•  The manner that you carry on the activity and the expertise of the taxpayer in this industry
•  The time and effort spent in the activity
•  The taxpayer’s history and success in this industry
•  The elements of personal pleasure or recreation

Here are some ways to ensure your for-profit business is not considered as a hobby:

1. Keep thorough and professional books.

2. Use a separate business bank and credit card account(s).

3. Log any personal use on assets, such as a camera.

4. Research trends in similar businesses.

5. Obtain insurance, registrations, certifications, licenses needed for that type of industry.

6. Maintain a second phone listing for business.

7. Document evaluations of your operation to attempt to improve the business’s profitability.

8. Develop a written business plan and update it annually.

9. Keep a detailed calendar of your business activities.

Here’s an example: Joe had a business as a personal chef. This was not his primary way of earning income. He had a W-2 job with a local city. He did earn about $200 to 300 in income; however, his expenses were much more than that. Come to find out, he was hosting dinner parties at his home and wanting to write off the food, subscription to cooking magazines, and seeds for his home garden.

If you are in doubt, just imagine yourself in front of an auditor explaining your specific situation. If it “feels” like the story above, it may not fly with the auditor, but that does not mean it is not a true business. What you need to do is plan and strategize. What can you do today to prove that you are a for-profit business?

Know the rules and then step out in confidence. And, don’t get tax advice from a friend because it might not be the whole truth! Consult your tax preparer to confirm your specific situation qualifies.