The federal Tax Cuts and Jobs Act went into effect beginning Jan. 1, 2018. Taxpayers are now seeing the effects of the Act as the 2018 tax returns are being prepared. Overall the TCJA is considered a positive move for business, though some small businesses take a hit with an increased flat tax rate. This year, companies are challenged to understand all the changes to take full advantage of the new laws. As the annual filing season draws to a close, we posed some questions to the CPAs of Integrated Tax Services, a tax and accounting firm located in downtown Vancouver, about the hurdles their clients are facing this year as well as the benefits they are seeing.
Answers have been compiled by Certified Public Accountants Leslie Currie and Micci Susott.
Overall, how have you noticed local businesses being affected by the changes in the Tax Cuts and Jobs Act?
Businesses are being affected in multiple ways depending on the type of entity. C corporations are now taxed at a flat 21 percent which affects small corporations that generated income less than $50,000. These small corporations were taxed at 15 percent in the past, so an increase of 6 percent was substantial.
Have you seen any other downsides for smaller companies and sole proprietorships from the new changes?
Overall clients are seeing that the preparation of their returns is taking longer and costing more to prepare. Many areas of the new tax laws required the IRS to issue regulations to clarify the laws. This not only delayed our ability to start preparation of the returns, but each return needs to be looked at to see how the new laws affect them.
The Qualified Business Income Deduction is new this year. What kinds of businesses are eligible for this deduction, and how does it benefit them?
Overall the partnerships and S corporations are benefiting from the Qualified Business Income Deduction (QBID).
All sole proprietorships, partnerships and S corporations that operate a qualified trade or business are eligible. Rentals may or may not qualify depending on whether they are held as investments or are true businesses. Each qualifying entity with net income is eligible to receive a 20 percent deduction of the business net income. This deduction is taken at the personal tax level reducing the taxable income. Rentals being held as investments do not qualify and specified service businesses like health care, attorneys, accountants, consultants, financial services, performing arts and athletics are subject to limitations. Qualifying entities with losses will be affected in future years as the loss offsets future income thus reducing the deduction allowed.
What change or changes are having the biggest effect on your clients? What trends are you seeing this year?
In addition to the change in tax rates for C corporations and the QBID, additional bonus depreciation is available to businesses that invest in equipment and fixtures.
Most of the actual tax effect is noticed at the personal tax level for those individuals with sole proprietorships, partnerships and S corporations because the taxable income or loss flows through to their personal tax returns and personal tax rates.
There are several changes in depreciation deductions under the new law. How have the new temporary 100 percent expensing and other depreciation deductions affected your clients?
All of our clients that made purchases of qualifying depreciable property have taken advantage of this 100 percent bonus depreciation deduction. Clients can also deduct the entire cost of eligible property using the section 179 deduction, but so far few have used this option as the 100 percent bonus depreciation is taken first. However, we have not seen that clients have increased their purchases because of this deduction.
How are business clients coping with the changes this year?
There has been so much information put out about the new tax law that many people are overwhelmed trying to pick out the pieces that apply to them. Our best advice is don’t try to figure it out on your own! There are many interrelated factors to consider, and it takes a team effort to come up with the best plan. Every business situation is different.
What should our audience keep in mind in the coming year?
We have spent hundreds of hours studying the new law and its implications for small businesses and their owners. The Tax Cuts and Jobs Act offers multiple opportunities for businesses and individuals to meet and plan with their tax professionals how to minimize their overall tax burden. Business owners should review their business structures, timing of purchases, and compensation packages and how the new law affects their existing situation. When possible, be sure that the tax preparer that completes your business return also knows your personal tax situation so they can maximize the overall benefits. Talk to your tax professional about your specific situation. It’s more important than ever to understand how the decisions you make can affect your taxes.
Washington State Department of Revenue holds free webinar about business taxes
In addition to meeting the new federal requirements under the Tax Cuts and Jobs Act, businesses must report state taxes, which are subject to change. To help reach and inform more Washington businesses statewide, Revenue will host a free live webinar for new and small business owners this month.
Date: Wednesday, April 10
Time: 10 a.m. to 11 a.m.
Registration: Send an email to DORWebinar@dor.wa.gov with the following:
your name, company name, phone number and e-mail address.
Contact: Revenue’s Rick Stedman with any questions about the workshop at 360-705-6624 or email@example.com. The deadline to register is Tuesday, April 9.
Participants will learn about Washington excise taxes, reporting classifications, deductions, sales tax collection and record-keeping requirements. During the webinar, the facilitator will answer specific questions related to your business. Continuing education credit is also available.
Business owners can also watch a short streaming video version of the quarterly offering and explore more resources at dor.wa.gov/workshops-education.
The upcoming webinar is not specifically related to this year’s filing season, said Revenue’s Rick Stedman, but will provide answers to common questions like how and when to file, as well as general information. Webinars are live, so business owners have the opportunity to ask questions in real time, and Revenue will make a personal connection afterward if it’s warranted.
“What we do is encourage people bring questions specific to their business,” said Stedman, “whether they are just starting out or planning to open soon.”