Small business owners and the TCJA
Taxes in general can feel like a complicated maze to navigate. As a small business owner, you may wonder, “what’s the best way for me to go about this?” Or you may wonder, “could I be doing this a better way to save reduce my taxes?”
With the pervasive changes of the Tax Cuts and Jobs Act, now is a great time to ask those questions. There’s bound to be surprises, good and bad, and we have already seen a few of them!
Here’s a few items we found while preparing tax returns under the TCJA this year and how they may impact small business owners:
- 20% Section 199A Qualified Business Income (QBI) deduction
- Meals and entertainment expenses
- Unreimbursed employee expenses
1. The 20% Section 199A QBI deduction
First, we saw the QBI deduction reduced the tax liability for those who qualify. You are generally eligible if you make less than $315,000 as a married couple or $157,500 as an individual, and the deduction begins to phase out between $315,000 – $415,000 for married couples and $157,500 – $207,500 as an individual.
If you are above this limit and you are a professional service business, you are not eligible for the deduction.
If you were not eligible for the deduction, and you would like to qualify in 2019, there may be some tax strategies to deploy now. Small business owners could also consider switching to a C corporation, which is only taxed at 21% under the TCJA.
2. Meals and entertainment expenses
The TCJA eliminated the deduction for entertainment, amusement or recreation expenses. Taxpayers can continue to deduct 50% of the cost of business meals that are not considered lavish or extravagant. However, if food and beverages are provided during an entertainment event, it must be purchased separately from the event. In order to maximize deductions for 2019, make sure to set up your accounting system to track these expenses.
3. Unreimbursed employee expenses
The TCJA has eliminated the deduction for unreimbursed employee expenses. While this may not directly impact small business owners, we’ve seen employees requesting reimbursement from the employer now. For employers in Illinois, effective January 1, 2019, Illinois requires employers to reimburse employees for work related expenses. If your company does not have a written expense reimbursement policy, it’s time to get one. (We include one in several of our packages for our clients.)
In summary, these are three areas where a little bit of tax planning, combined with the proper setup of your accounting system can go along way. If you had some unwelcome surprises or missed opportunities for 2018, it’s not too late for 2019.
If you need help navigating the maze, contact us to schedule an appointment today!