We just finished filing taxes under the largest reform in 30 years! As we reflect back on this filing we’ve compiled a list of key takeaways for family business owners. The biggest changes are: the increase of standard deductions, changes to the income tax brackets and the addition of a new qualified business income deduction.
1. Limitation on State and Local Income Tax Deductions
The tax law change in 2018 created a new cap for itemized deductions of $10,000 for state and local income tax and property taxes.
While taxpayers in California and New York were hit the hardest, some taxpayers here in West Michigan also hit the cap. Those who fall into higher income tax brackets, high property tax and second homes were impacted the most by this cap.
2. Charitable Giving Impacted by Tax Reform
Charitable contributions may not have as much of an impact on your tax return as a result of the increase in the standard deduction but that doesn’t mean you shouldn’t donate! By the way, you may not have received as much of a benefit from contributions in the past as you thought. We have more information on this topic in a post called Charitable Giving Under the New Tax Law.
3. Entertainment Expense is No Longer Deductible
Business related entertainment expenses are no longer deductible. Certain business meals remain 50% deductible and the substantiation requirements have changed under the new law. But, sorry sports fans, those business related rounds of golf and sporting event tickets are no longer tax deductible.
4. The Loss of Miscellaneous Deductions May Hurt
In the past you may have been able to deduct a portion of investment fees and expenses, tax preparation fees as well as casualty and theft losses. These miscellaneous deductions along with a list of others were eliminated under the new tax reform. The actual impact on each taxpayer will vary.
5. Unreimbursed Business Expenses May Impact your Employees
A portion of unreimbursed business expenses are no longer tax deductible on an individual taxpayer return. One example of this change may apply to your sales staff. Previously some employees would write off meals, travel, vehicles, etc. that were not reimbursed directly by the company. As an employer, you should recognize the change in compensation for these employees and consider creating a plan to reimburse them according to IRS guidelines.
6. Qualified Business Income: Beneficial for most Family Businesses
Introduced in this tax reform is the new Qualified Business Income Deduction. The deduction is 20% of qualified business income subject to limitations. Depending on the type of business entities (S-Corp, Partnership, Sole Proprietor), the industry you participate in and your income level, your qualification and level of this deduction will vary. In addition, the complex formula may be impacted by retirement contributions and other moving pieces.
7. Covering Moving Expenses Now Counts as Income for Employees
Whether you reimburse a new employee for moving expenses or whether a new employee pays for moving expenses themselves, the tax benefit has been eliminated. If you reimburse the expense it is now considered income to the employee. If the employee pays the moving expense, the tax deduction is eliminated.
8. Tax Returns for Business Owners More Complicated
The largest tax reform in 30 years means CPAs have to relearn the rules. It’s taking longer to digest the rules and translate them as it applies individually to you and your company. We expect that you saw an increase in billable time for the preparations of your returns this past filing season.
Thanks to the Family Business Alliance for posting these tips on their website as well. See it HERE.