As you already know, It’s official. In december, 2017, both chambers of Congress have passed the Republican tax overhaul bill. Learn how this affects the small business owners, including franchise owners.
The new tax overhaul will affect the entire US economy and everyone in it! As you might have heard, this bill leans heavily toward tax cuts for corporations and business owners.
The bill would not affect 2017 taxes, for which Americans will start filing their returns in a month or so. But it will affect 2018 taxes, so it is important to understand what it is, how it affects you, and plan strategically for your next year.
This article is not by any means focusing on supporting or contesting this new measure as well as Trump’s government. Our goal is solely to help small business owners understand how they are impacted by this bill.
We interviewed Mr. Mo Shaban, a seasoned CPA who has been in practice for over 29 years. Mo owns a degree in Business Administration with an emphasis in accounting, by the San Diego State University. In addition, before opening his private practice – Shaban Accountancy, in San Diego, CA – he has worked for Arthur Andersen and Co, the biggest CPA firm in the world. He has opened his own practice in 1996.
Here are his answers to the questions we asked:
1) Can you help us understand in broad terms what is the new GOP tax plan (the rationale behind it, when it will be live, who is affected in general)?
Mo: Basically the government wants to stimulate the economy through what’s called a trickle-down economics. This means you give the largest companies a tax break and then they will in turn hire more people and give raises and that will create additional spending.
2) Who is most positively affected by the plan?
Mo: Initially big business. I would say the fortune 500. But then the trickle-down economics should help all small business. This is a great time to be in business for yourself!
3) Who is most negatively affected by the plan?
Mo: I would say W-2 people. The CA state tax deduction is capped now. Mortgage interest deduction lowered. Non-reimbursed business expense gone. The only real place to be able to take major deduction is to be self-employed, S corp or an LLC.
4) Let’s focus on the small business owner…how is the small business owner affected by the plan?
Mo: Yes there is a potential huge savings here. If the small business owner is married and their total income is below $315,000 they get some good breaks. And always the small businesses get deductions you can’t get as an employee. We can discuss them individually.
5) Does the plan in general provides incentives for a given person to become a business owner, instead of working for corporate America?
Mo: 100%. Again there are deductions like auto, equipment write-off and meals that you can’t deduct as a W-2 but can as a business owner. In my answer to question 8 below, I provide some additional examples.
6) Thinking about the franchise industry, some businesses are characterized for a large upfront investment (Build-out cost, equipment, furniture, etc) while some others don’t have a large upfront investment but can he very labor intensive (lots of employees), and others are home based with few to no employees – Does the new tax plan provides more incentives for a given type of business in general?
Mo: Of course under the heavy equipment you can take advantage of code section 179 and write off your equipment in one shot…Even if you haven’t paid for it yet. Heavy employee depending on the location may get some government help to hire underprivileged employees. In truth, there are benefits for all to me, each one with specific aspects to it. Need to discuss separately to see all the advantages.
7) When it comes to the business entity type, how does a LLC differ from a corporation, when it comes to taxation?
Mo: In most cases S corps are beneficial for businesses. However there are cases where an LLC is better. If you have no employees and just a few partners an LLC may be better since you don’t have to do payroll. Both protect your personal assets to some degree. They are much much better than a sole proprietor. Sole proprietors get audited the most of any tax form.
8) What are some typical tax deductions that a small business owner can benefit from?
Mo: The answer to this question is quite long, as there is a comprehensive list to consider, which I describe below:
- Section 179 deductions: Under Section 179 of the Internal Revenue Code, a business could expense up to $500,000 of the cost of qualified business property, subject to a dollar-for-dollar phase-out above $2 million. These figures were indexed for inflation. The new doubles the maximum allowance to $1 million and increases the phase-out threshold to $2.5 million. Caveat: The maximum allowance is still limited to the amount of income from business activity.
- Bonus depreciation: In recent years, the percentage for first-year “bonus depreciation” deductions has fluctuated, complicating tax planning. Now the new law hikes the bonus depreciation deduction from 50% to 100% for five years and then gradually phases out the deduction over the next five years. Added bonus: The deduction has been expanded to include “used” property that otherwise qualifies under this provision.
- Luxury car deductions: The annual depreciation limits for “luxury cars” kick in at surprisingly modest levels, Now the new law hikes the limits for business drivers for cars placed in service in 2018 and thereafter. For instance, not even counting bonus depreciation, the first-year deduction jumps from $3,160 to $10,000. Of course, actual deductions must be based on percentage of business use.
- Pass-through business tax provisions: Pass-thru entities include sole proprietorships, real estate in schedule E, single member LLC’s, multi-member LLC’s, S corporations, and trusts and estates.
- Income Limits: If your taxable income is under a certain threshold (The threshold amount of taxable income for such taxpayers is $157,500 and $315,000 for joint returns, indexed for inflation amount) then the deduction is 20% of the pass through income from your business. If your income exceeds the threshold tow complications kick in. One is a Wage or wage plus property limit and the other is a phase-out limit.
- Under the Wage or wage plus property limit: If your taxable income exceeds a certain phaseout range (i.e., the threshold amount from above, plus $100,000 if married filing jointly or $50,000 if single/head of household/married filing separately), then your deduction for each business will be limited to the greater of: 50% of the W-2 wages paid by the business, or 25% of the W-2 wages paid by the business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all “qualified property” (basically, depreciable tangible property that is used by the business or held by the business and available for use). If your taxable income is in the phase-out range, the calculation basically says, “If you were past the phase-out range, how much would the wage (or wage + property) limit reduce the amount of your deduction? Now, instead of reducing your deduction by that whole amount, we’ll multiply that reduction by a percentage that is the percentage of the way you are through the phase-out range.”