In our last taxing episode… (cue organ music) … our heroine, Angela Morrison, CPA, MSA, MST, and Partner at Huntington Tax Partners in Bedford, provided valuable insight on how the new tax laws affect homeowners. Today, she’ll discuss what they mean for businesses.
Real Smarts: “Hello again, Angela. We have to ask, are you sick of our questions? It’s just that taxes can be very confusing especially for business owners. Can you start by giving us the “big picture” on what the act means for businesses?”
Angela: “Of course I’m not sick of your questions. I believe it’s better for people to be more informed than not know anything at all. For C corporations, the maximum corporate tax rate went from 35% to 21% and the alternative minimum tax (AMT) has been eliminated. For pass-through entities, there is a possibility they may qualify for the new 20% deduction. It depends on how much taxable income the owners have and the industry. If the owner of the business has taxable income under $157,500 (single) or $315,000 (married filing jointly, MFJ), then they would receive the 20% deduction regardless of the services the business provides.
If the owners of a business are over the $157,500 (single) and $315,000 (MFJ) thresholds, then depending on the services the business provides, there are different calculations. There is no short or easy way to explain the different calculations, but people should be aware that there are different calculations depending on your income and the industry of the business.”
Real Smarts. “It sounds like some key expenses for businesses are going away, can you talk about those?”
Angela: “Yes. Employee meals provided on business premises are no longer 100% deductible and are subject to the 50% limitation. Any and all entertainment expenses are no longer deductible, so there’s no longer a benefit of having season tickets or taking clients golfing. The Act also limits the ability to deduct interest expense to 30% of income if the business’ gross receipts are above certain thresholds.”
Real Smarts. “What other important things should business owners know about the impact of the new tax Act?”
Angela: “Through 2022, companies can deduct 100% of the cost of qualified property. The term qualified property was expanded to include used property, not just new property. The downside of bonus depreciation is some states (including Massachusetts) do not recognize it, so businesses will have differences for depreciation expense for federal and state purposes. In addition to bonus depreciation being extended and expanding, Sec 179 was also expanded. Expensing limits have been increased to from $510k to $1 million with a phase-out limitation of $2.5 million instead of $2.03 million. The definition of qualified real property for Sec 179 purposes was expanded to include a lot of improvements for nonresidential real property that would normally be required to be depreciated (roofs, heating systems, security systems, etc.).”
Real Smarts: “What are the most common mistakes business owners make when doing their taxes in general – and how can they avoid them?”
Angela: “I think a lot of small businesses don’t capture all of their income or expenses because they do not track them properly throughout the year. Regardless of the size of your business, you should always keep your personal accounts separate from your business accounts. You should reconcile your bank accounts and credit cards each month and make sure everything is captured. If you keep everything separated and you reconcile each month, you are guaranteeing that you aren’t missing any business expenses.”
Real Smarts: ‘Thank you Angela. This was very helpful. In the next part of our series (SPOILER ALERT), we’ll talk more about the tax filing options – whether you should use an online service, a tax prep company, or a professional.”
Angela: “I’ll be there.”
Real Smarts: “Tune in next blog for the exciting conclusion of our tax series (cue organ music).
Do you have a tax question? Real Smarts invites you to ask us via social media. As part of our tax series, we’ll pick a question and have Angela provide an answer.