If you’ve watched the news for even 10 minutes during December, you’ve undoubtedly heard about the new tax bill that has been passed. With so much being said about this bill, it can be hard to separate the noise from the truth. What will this really mean for small business owners?
First of all, the 2017 Tax Cuts and Job Act takes effect in 2018 and will not impact your 2017 taxes. This gives you some time to talk with your accountant and find out how these changes will affect your specific situation. However, there are a few items that you may want to take advantage of this year before the benefits are eliminated or drastically reduced next year. (Keep in mind the below suggestions are only helpful for those who currently itemize using the Schedule A form.)
If you own a home, consider prepaying your 2018 property taxes before the end of 2017. If you live in New York, Governor Cuomo signed an emergency Executive Order that will allow you to prepay next year’s property taxes this year, before the new tax law takes effect. If you live outside of New York, you’ll need to check with your municipality to see if they are accepting prepayments.
This is important to understand because the new tax bill puts a cap on the amount you can deduct for state, local and property taxes at $10,000 — as compared to previous years in which this deduction was unlimited. In high-tax states including New York, New Jersey and Maryland, some homeowners will be paying a lot more in taxes, which is why prepayment could save some homeowners a lot on their taxes this year. If you own a rental property, you’ll still get to deduct your property taxes on a Schedule E under the new law, so there’s no need to make a prepayment for property taxes on a rental.
Making Early Quarterly Payments
If you make quarterly estimated payments, consider making the fourth quarter state payment before the end of 2017 (e.g., pay by December 31 instead of the due date of January 15). This is because the standard deduction for individuals will almost double to $12,000, which is up from $6,350 in 2017. Married couples will see their standard deduction rise from $12,700 in 2017 to $24,000 in 2018.
This means that some things you itemize for your deductions in 2017 may not qualify next year. While you can still wait until the due date (January 15) to make your fourth quarter federal payment, keep in mind that prepaying 2018 state income taxes is expressly forbidden…so there’s no point in trying to overpay your state income taxes. Just think about making your Q4 payment early, before this year ends.
For Small Businesses
So what does this bill mean for the small business owner? Probably the most discussed (and most controversial) portion of the tax bill is its reduction in corporate tax rates, which decreased payments from 35 percent to 21 percent. However, this tax cut applies only to C Corporations, not businesses classified as “pass-through” entities, including LLCs, S Corporations and sole proprietorships.
But don’t worry, small business owners still came out ahead by receiving “a substantial, across-the-board 20 percent reduction of their business income,” as explained by Yahoo Finance. “A sole proprietor generating $200,000 of business income would be able to deduct $40,000 on his Schedule C. Instead of adding $200,000 to his adjusted gross income, he would add $160,000.”
If You Have Employees
If you have employees working for you, you’ll need to discuss with your accountant how the new tax bill will affect withholding. According to Capital One, “When the standard tax deduction was doubled, personal exemptions were eliminated. So employees will probably need to complete new IRS Forms W-4 that reflect the new rules as soon as possible… If you pay your employees bonuses or supplemental wages, you probably currently withhold up to 25 percent for federal taxes. With the new bill, that number will go up to 28 percent, another change that may affect your bookkeeping.”
With all of these changes taking place, you must have a lot of questions rolling around in your mind. We suggest contacting your CPA or accountant today to ensure that you make the most of these tax changes.
Additionally, you may be wondering if you’re operating the right business entity since there are many changes that will probably impact your company. At Incfile, we have a team of legal experts who can discuss this topic with you to help determine what type of entity is best for your unique situation. Contact us today.
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