While taxes can’t be escaped, there are ways to help lessen the impact. When it comes to managing your own firm’s tax situation, remember these IRS tax reform provisions that affect businesses in addition to the latest tax reform for small business.
Double check the latest deductions
Tax reform under the Tax Cuts and Jobs Act (TCJA) enacted in December 2017 affected nearly every business and individual in 2018 and the years ahead. Because of this reform, your business expenses may be taxed differently. However, you’re still allowed to write off standard business expenses, such as marketing, business equipment, employee costs and financial planning software.
Here are five small business tax deductions that could impact how you file:
- Depreciation of assets: Small business owners can immediately write off more property expenses, and that includes certain improvements to a building’s interior, roof, HVAC systems, fire protection systems, and alarm and security systems. What’s more, the deduction ceiling increased from $500,000 to $1 million.
In the first year, businesses can deduct 100 percent of the cost of certain eligible property acquired and placed in service after September 27, 2017, and before January 1, 2023. The 100 percent allowance begins phasing out after the 2022 tax year and expires January 1, 2027. - Accounting method: Businesses with an average of $25 million or less in profits for the last three years can use the cash method of accounting, so your taxes can reflect only real profits.
- Meals and entertainment: Entertainment expense deductions have mostly been eliminated. However, you can still write off 50 percent of client meals if you stay within specific IRS criteria.
- Employer credit for paid family or medical leave: Business owners can deduct up to 25 percent of wages for qualifying employees for up to 12 weeks per taxable year. Because there are specific rules for calculating the percentage, please consult your tax advisor. Thanks to the Consolidated Appropriations Act of 2022 (CAA), this tax credit extends through 2025.
- Commuting costs: The TCJA cuts any tax deductions for commuting costs for you and your employees — with one exception. If any of your employees bike to work and you have a program in place to reimburse them for their bicycle commuting expenses, those costs can be deducted from now through 2025.
Reassess your business entity
Perhaps the biggest change with this tax reform relates to how you set up your business. Self-employed financial professionals who earn less than $157,500 in tax year 2023 (or $315,000 for those filing joint returns) can potentially qualify for a 20 percent qualified business income (QBI) tax deduction.
- S Corp – If your business is structured as an S Corp, you aren’t necessarily required to pay additional business taxes on top of your personal taxes. If you are in the top income bracket, which has a 37 percent tax rate, then your personal tax rate will top out at 29.6 percent after the 20 percent reduction.
- Partnership or sole-proprietorship LLC – If your business is set up as a partnership or sole-proprietorship LLC, which also usually acts as “pass through” entities that don’t require ownership taxes, you may qualify for the 20 percent deduction.
- C Corp – If your business is a C Corp or another structure that requires business taxes, you won’t qualify for the 20 percent deduction. However, there may be other cuts designed for corporations that could help decrease your tax burden. TCJA requires a flat 21 percent tax for C Corps on top of your personal taxes.
Considering if your business entity is still the right choice may help you save the most on your taxes. In addition to these deductions, there are TCJA rules on business losses, interest expenses and alternative minimum taxes.
Two things you can do today
- Read “The Highlights of Tax Reform for Businesses” from the IRS and review your business deductions from last year with your tax advisor.
- Review the structure of your business entity against the newest IRS and Small Business Administration guidelines.
Given reform from the Tax Cuts and Jobs Act and with some deductions potentially expiring, consulting with your tax advisor is the best way to make sure you aren’t missing out on any tax savings.
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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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