Ever since Congress passed the New Tax Code in December 2017, everyone has been wondering how the changes would actually impact them. In early 2018, I had the opportunity to meet with with several Senators and Congress members at the largest ever small business summit in Capitol Hill. The small business owners present tried to get the inside scoop on the new tax bill. However, at the time, the Congress members and Senators didn’t know the finer details. In fact, even the IRS was still trying to unpack the new tax bill!
Finding Expert Advice
Fast forward to the end of the tax year, and I was still trying to figure out how the new tax laws were going to affect my small business. So, I turned to my brilliant colleague, Brittany Turner. Brittany is an experienced accountant, forward thinking entrepreneur and wrote a great article for us in the past about proactive tax planning.
Here’s Brittany’s key tips for making the new tax code work for your small business. Enjoy!
The Top 4 Rumors About the New Tax Code Debunked
Guest Post by Brittany Turner
Since the new tax laws went into effect in 2018, we’ve been hearing all kinds of rumors about how they will and won’t affect creative business owners. This misinformation is causing undue panic and improper planning by business owners large and small. Below, we are going to set the record straight with 4 of the biggest (and possibly juiciest?!) rumors we’ve heard about these new laws.
Business owners cannot write off expenses because there are no longer any itemized deductions.
Oh! This is our favorite one.
So – maybe you’ve heard it, and maybe you haven’t. People spreading this rumor are confusing the fact that employees can no longer deduct their expenses as part of their itemized deductions.
The new tax laws did get rid of itemized deductions for the most part, which did eliminate the ability for employees to deduct their unreimbursed expenses. So, let’s say you are an employee and you pay for your own supplies, like teachers for example. In the past, you would have been able to deduct the cost of your unreimbursed expenses on your Schedule A, the form that you use for itemized deductions. This is no longer allowed.
But, business owners, creative entrepreneurs, freelancers, basically everyone who is generating income that’s not reported on a W2, never deducted their business expenses on the Schedule A anyway. They use either a Schedule C if they’re a sole proprietor or on their Partnership, S-Corp, or C-Corp return.
Basically, people heard that there are no more work expenses deductible on Schedule A and assumed that meant no more business deductions. Luckily, this is not the case. Even if you don’t have an LLC, you’re still entitled to deduct your ordinary and necessary business expenses on your return.
Service companies are not entitled to the 20% deduction on pass-through income.
TRUE AND FALSE
This new 20% deduction under Section 199A does have a whole damn slew of hoops you gotta jump through. However, simply being or not being a service company does not automatically qualify or disqualify you.
In short, as long as the taxpayer’s income is under the threshold ($157.5k for individual or $315k for married couples), it doesn’t matter what the business does.
The long version is that income is the first hoop. If the taxpayer comes in under those thresholds, then they are free and clear to the end of getting a 20% deduction of their QBI (qualified business income).
If the taxpayer does not come in under this threshold, then we have to look at what the business does. This is where the service company vs. non-service company comes into play. But, there is still hope! Even if the business is a service company, there’s another income threshold and some other metrics to consider. There could still be a deduction; it just might not be for the full amount.
Now that itemized deductions are gone, I won’t be able to write off my home expenses or state taxes!
TRUE AND FALSE
There’s still the possibility for a deduction for these items; it’s just limited.
You can still deduct your mortgage interest on loans secured before the end of 2017.
For the real estate and state/local income taxes – there’s still a deduction available, but there is a cap of $10,000. If you are a taxpayer living in states like New York, New Jersey, and California, it’s extremely likely that you will only be able to write off one of the other. A lot of homeowners in states that have an income tax assessed are going to feel the brunt of this change.
I cannot write off my meals and entertainment anymore.
TRUE AND FALSE
Again, this is both true and false. You can deduct your meals, but entertainment is no longer allowed. No more tickets to sporting events, golf meetings, things like that. There are also new limitations on deducting meals. In the past, some meals were deductible at 100%, but now they’re only deductible at 50%.
CPA and Founder of Countless LLC
Brittany Turner is a NYC-based accountant with a passion for working with small businesses. She founded Countless LLC, a modern and vibrant accounting firm.
Do you want to learn more about how the new tax rules will affect your business? If so, Brittany would be happy to provide more personalized insight! Reach out via email to discuss your questions or for general tax planning!