How the New Tax Law Affects Your Small Business Deductions
2018-06-08 | by Gene Reynolds
The new Tax Cuts and Jobs Act that passed for the 2018 tax year will significantly impact your small business deductions.
On one end of the spectrum, the Act created an important new tax deduction for qualifying “pass-through” businesses. On the other end of the spectrum, small businesses might need to re-think their meals and entertainment expenses for deduction purposes.
The key is knowing how to take advantage of the new “pass-through” deduction while also adjusting your business activity to make sure you are not relying on the meals and entertainment expenses deduction.
The Pass-Through Deduction Provides Welcome Relief for Small Business
The new pass-through deduction is a welcome relief for small business owners. If you qualify, you will now be able to deduct 20 percent of the income generated by your business that is “passed through” to your individual income.
What type of businesses qualify for the deduction?
- Sole proprietorships
- S Corporations
- LLCs and LLPs
The common factor for these types of businesses is that the entity itself does not pay taxes, like a corporation. Instead, the gains or losses are “passed through” to the individual owner(s) who pay taxes on their individual tax return.
There are exceptions to the deduction, though, if you generate income above a certain threshold that impacts your ability to deduct the full 20 percent.
The threshold of qualified business income (QBI) is $315,000 for a married couple filing jointly or $157,500 if filing individually. If your QBI falls below the threshold, you can deduct the full 20 percent.
However, if your QBI is above the threshold, you will be entering the complicated territory of whether you can claim a deduction based on the nature of how you generated the income.
Specifically, the new tax law separates service providers (such as athletes) and non-service providers (such as manufacturers). To find out more about where you fall in this breakdown, be sure to contact a business tax specialist such as Reynolds and Associates to discuss further whether you qualify.
Changes to the Meals/Entertainment Expenses Deduction Could Affect Your QBI
Many small business owners utilize the meals/entertainment expenses deduction to reduce their qualified business income, thus reducing the taxable income “passed through” to their individual tax return.
One of the trade-offs to the new tax law for small businesses is a change to what counts as deductible meals/entertainment expenses.
Previously, small business owners could partially deduct the cost of a meal provided to a client before or after an entertainment event. Now, that is not deductible.
Or, employees could fully deduct the cost of providing lunch to their employees on company premises. Now, small businesses can only deduct 50 percent of that expense.
Essentially, any fringe benefit provided by your small business — such as transportation or parking — that is typically recorded as a meals/entertainment expense is subject to elimination or a reduction in how much can be deducted.
One solution suggested in this Forbes article is to find deductible expenses that benefit your employees, such as offering employer-sponsored retirement plans that are fully deductible.
Contact Reynolds and Associates for Support on the New Tax Law
The new tax law is overall helpful for small businesses, but the law could also cause some changes to your deductions and qualified business income.
To find out the total impact of the meals/entertainment change to your business and discuss alternative solutions, contact Reynolds and Associates to discuss the specific needs of your small business. Reach out to our team either by email at email@example.com or by completing our Contact Form.
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