Taxes and tax laws may seem like a moving target as we move into tax preparation season. Once you get them down and file accordingly, the laws change and you have to adjust your plan. And that will once again be the case with the recent Tax Cuts and Jobs Act (Sec. 199A), which is the first major tax reform in over 30 years. According to The Washington Post, the tax changes are primed to affect every American household and business, and how we approach tax preparation. These changes affect service businesses in particular, so it’s a good idea to study up and start your tax return early to be sure you revise and comply, as necessary. Familiarizing yourself with the changes now will also ensure your business makes the most of tax updates for 2018.
If you have access to The Wall Street Journal, this calculator is a helpful tool to guide your tax preparation. The Penn Wharton Budget Model actually provides the foundation for this calculator and offers great insight into the impact of the federal budget.
Potential Pass-Through Tax Savings
If your business is like 95% of American businesses and organized as a pass-through entity – an LLC, S Corp or partnership subject to the income tax rate of the owner or partner – the business provisions updates will likely change your tax return.
The upside: income from a pass-through entity is eligible for a preferential maximum tax rate of 25%. Compare this with the previous law, allowing tax rates of up to 39.6%. However it’s worth noting that 85% of small businesses are already paying taxes at 25% or less.
Small business owners making $150,000 or less (married filing jointly) will also get a small break. Their first $75,000 in income will be at a 9% rate, however this will come in phases and not be fully available until 2022. This point is the reason the National Federation of Independent Business (NFIB) backed the act.
Changes to Your Tax Preparation… and your Service Business
The catch in the 2018 business tax updates is in the restrictions. Service companies are excluded from the lower tax rate. A specified service business is one that involves the performance of services in the field of consulting, law, health, athletics, performance/arts, financial, brokerage or any trade services. Essentially, if the principal asset of your trade or business is your reputation or skill, or that of the business owner or employees, you are a considered a service business. The exception here concerns engineering and architecture services – for the purposes of the new business tax, they are excluded from service businesses.
One option to deal with these tax updates for 2018 – become a non-service business. Since taxation differs on how businesses classify themselves, and small service businesses will now be among the hardest hit, it may be worth the look to see how your business could make changes to not just your tax preparation, but also your business classification. In fact, reclassifying as a non-service business could cut your taxes by up to 20%.
While these tax law changes will undoubtedly cause confusion and frustration, there is the potential for great payoff. Detailed accounting and tax preparation will be essential in helping business owners navigate the changes and stay ahead of their tax return. To take advantage of the business tax changes, and make any other changes in your business, enlist Stableford Capital tax services by calling our main tax line at 480.998.0911.