The federal tax reform passed last year is named the “Tax Cuts and Jobs Act of 2017.”
Tax expert Bev Stitely calls it a “permanent employment act” for accountants and tax professionals.
“There is no ‘one size fits all’ to this. … You really need to understand the tax code or be working with someone who understands the tax code,” Stitely said of the new federal changes.
“You want to be proactive, not reactive,” added Andrew Serafini. He’s president of the Serafini Financial Group, a financial planning firm in Hagerstown, Md., and he said many businesses benefit by having a team — an attorney, a financial planner and a tax accountant.
Stitely, managing partner of Saunders Tax and Accounting of Hagerstown, presented a primer on the new tax law during a recent luncheon sponsored by the Washington County Chamber of Commerce.
“The biggest thing truly is tax planning for businesses,” she said before the presentation started. “They need to have it in place, be working their plan all year long. There is no such thing as a good tax surprise. You don’t want to wait until you get your taxes done to find out what you should have done last year.”
For individuals, the basic provisions of the tax code lowers most people’s tax rates, increases the standard deduction and eliminates most exemptions. As her staff calculates 2017 tax returns, she said, they’re using the same numbers to preview what clients would owe for this year under the new reforms.
“In most cases, people are making out better,” she said.
The change for businesses that perhaps got the most attention, she said, was slicing the corporate rate from 35 percent to 21 percent. There’s also a 20 percent qualified business income deduction aimed at small businesses.
“It has made things more complicated. It is not the postcard tax return, especially if you are a business,” she said, referring to an image used by President Donald Trump during the debates on the measure.
Referring to the qualified business income deduction, Stitely presented a several-step formula with the thresholds and potential deductions.
“This is not a do-it-yourself calculation,” she said.
In addition, the law excludes some types of businesses from the qualified business income deduction unless personal taxable income is below certain thresholds. The law defines those ineligible service trades or businesses as:
“Any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners; or any trade or business which involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities.”
Looking at the tax change, she said some ventures might see this as a good time to reorganize their business structure.
“Your business grows and changes. … But you need to know the time to do it,” she said.
From a financial planning standpoint, Serafini also said business owners should take a look at their structures. There could be some financial benefits in moving from an S Corporation to a C Corporation. (Under U.S. income tax law, a C corporation is taxed separately from its owners. An S corporation typically is not taxed separately.)
Business owners might ask, “Do I move, or do I stay? And how does that impact me?” Serafini said.
On another topic, he said new rules about capital investments and withholding might mean it’s time to review plans for future investments to take advantage of tax breaks.
Stitely and Serafini also said the federal tax could ripple into changes on your state and local tax returns as well.
Generally speaking, they said, the elimination of some deductions might show up in higher taxable income. Lower federal tax rates, however, might mean paying less U.S. taxes, even on a higher taxable income. At the state level, though, the rates haven’t changed — so someone could pay less in federal taxes but more in state levies.
“How does it radiate down?” said Serafini, who also serves as a Maryland state senator. “The implications will become somewhat dynamic.”
Another change hits business entertainment expenses. Rounds of golf with clients, for example are no longer deductible.
The math can get a little tricky for employer/employee spending as well, Stitely said.
Stitely used the example of a small business treating staff members to a meal to celebrate a birthday. Under the new law, the business can write off only 50 percent of that expense. But if the business pays for employee meals during a day-long, mandatory training presentation, it can write off all of the expense.
Some employees won’t be able to write off as many businesses expenses, either, she said. She used an example of an outside salesperson who receives a salary and who has been writing off $10,000 a year for business expenses. There could be a tax advantage for both the employer and the employee the person’s salary was cut by $10,000 and the business reimbursed her for the expenses, Stitely said.
Here’s a refresher on some of the major changes:
• The maximum corporate tax rate is sliced from 35 percent to 21 percent.
• The code moves to a “territorial” tax structure, meaning corporations that do business in other countries won’t be taxed by the United States on most profits generated abroad. This would align the U.S. with other industrialized nations.
• Most American businesses are “pass-through” ventures, taxed at the owner’s personal rate. Under the reform, a business owner might be able to deduct up to 20 percent of income, with some limits for those earning above $157,500 (single) and $315,000 (married, filing jointly). But the credits don’t apply to some “professional service” businesses, such as legal consulting.
• Businesses should have already changed what they withhold from employees’ paychecks. The standard tax deduction has doubled. Personal exemptions have been eliminated.
• Businesses can not fully deduct the cost of food and beverage provided to workers. They may deduct up to 50 percent of those costs.