Let’s face it. Owning a business is not always the most straightforward venture and, unfortunately, there is no definitive guide on how to make it so. Each and every business is different; and, despite how similar two businesses might be, what’s best for one may not always be best for another.
As we head into 2018 and start to consider the tax law changes that were approved in December, it’s important to keep this in mind. There are many different ways to look at these changes, which are the most extensive since 1986, and it’s important to consider how each business and individual will be affected. “This sweeping tax reform goes far beyond recalculating the tax brackets at the corporate and individual levels,” says Paul Dougherty, a tax law partner for Iselin-based advisory and accounting firm EisnerAmper. “There are implications at the state and local level, for charitable giving, international taxation, for estates and trusts and much more.”
Though it will be a full year before the implications of these changes are truly felt, Dougherty adds it’s important to take action now to address them.
“Because the 2017 Tax Cuts and Jobs Act is several hundred pages, it is imperative that businesses and individuals work with their business and financial advisors to understand the implications and fully leverage deductions and minimize their tax exposure,” he says. “Business (and individual) taxpayers really need to examine where they are now and what their short-term, immediate and long-term situation may be and plan accordingly.”
From a business standpoint, one of the most notable changes is the lowered maximum corporate tax rate, which went from 35 to 21 percent. This change is anticipated to help business owners earn more over time.
“Prior to the new law, corporations paid a graduated tax with most paying the maximum rate of 35 percent,” says Tiffany Wagner Donio, Esq., a partner at Archer Attorneys at Law in Haddonfield specializing in corporate law and tax law.
Donio also references the qualified business income deduction as a notable change for businesses.
“Individuals, trusts and estates that own pass-through entities (like S corporations or partnerships) are now entitled to a deduction equal to 20 percent of qualified business income,” she says. “This deduction reduces taxable income (similar to itemized deductions). [However], qualified business income deduction is limited based on the income of the owner, the amount of W-2 wages paid by the business and the cost of certain qualified property (ie., depreciable tangible personal property used to produce qualified business income).”
She adds there are restrictions on the QBI, and the deduction is not available with respect to certain service businesses—like attorneys, doctors and accountants—if the owner’s income exceeds certain amounts.
Sean Balliet, CPA, CFP, associate partner at tax, accounting and business consulting firm Baratz & Associates, P.A, in Marlton, notes another important takeaway is the elimination of entertainment expenses as a deduction.
“Under the new law, meals for employees both on and off the premises are now limited to 50 percent deductibility and any meals with clients, sporting tickets or any other entertainmenttype expense will now be non-deductible,” he says. “This may h ave a big impact on service industries such as restaurants and sports teams, as well as businesses that rely on entertaining clients, customers, patients and others that help develop business and generate revenue for their company.”
From an individual standpoint, Balliet notes there were more than 26 changes to the tax code that affected individual tax laws and tax filings.
“A few of the more important ones, in my opinion, were the reduction in the overall tax rates, the child tax credit and the narrowing of the applicability of the Alternative Minimum Tax (AMT),” he says. “Part of the reason the AMT will be eliminated for many people in New Jersey is because the state and local tax deduction is now limited to $10,000.
“I know many people are nervous about these tax law changes, but from numerous client examples I have run, most middle-class New Jerseyans will save in tax dollars in the upcoming years,” Balliet continues. “The reduction could be due to the fact that the lower tax rates will help reduce the tax liability, or the fact that the child tax credit—which has increased to $2,000 per child under 17 years old and is now eligible for any taxpayers making less than $400,000 (married, filing jointly)—allows for millions of Americans to reduce their overall tax bills.”
Blair Talty, vice president and director of wealth and fiduciary planning at Wilmington Trust, N.A. in Cherry Hill, agrees that taking a look at how the new law will impact a business or individual before making drastic decisions is key.
“[The state and local tax deduction] is causing people in New Jersey some real concern,” he says. “New Jersey residents have for some time paid higher income and property taxes than residents in many other states, but those taxes were typically fully deductible for federal income tax purposes. Now, with the federal income tax deduction for such taxes limited to $10,000 annually, people are concerned that their bottom line will be further negatively impacted.
“But, we’re suggesting our clients work with their professional advisors to see if there really is a difference from prior years’ aggregate tax liability, in terms of effective tax rate,” he continues.“What we’re finding is that, for many of our clients who have done the math, there really isn’t a significant change one way or the other. The government sells it as a tax cut, but it’s not really primarily a tax cut for individual taxpayers. It was an attempt at simplification and has resulted, in many cases, as just a different method of calculating your tax bill.” Though the changes overall may seem favorable, the true extent will not be calculated until they are applied during the next tax season. Taking the time now to anticipate how they may affect an individual or business filing is key, so that necessary changes may be made, whether it be adjusting a withholding amount, changing an entity choice, or more.
One key fact to keep in mind is that many of the changes sunset after 2025, which means they will return to what they were prior to these adjustments, says Talty. He adds that as new administrations take office, as new budgets are approved and new r ealities happen in the world, further changes may be made before the changes sunset.
“The only thing we know for sure about the tax law is that it doesn’t stay the same,” Talty says. “Take advantage of what the law provides when the law provides it. There’s no certainty it will continue to be an advantage.”
Published (and copyrighted) in South Jersey Biz, Volume 8, Issue 2 (February 2018).