Agreeing with Benjamin Franklin that there is nothing certain except death and taxes, Sketch Wood and his partner Minnie Brix, owners of Wood & Brix, and their 200 employees are certain that the new tax law will affect them, but they are a bit overwhelmed. Looking for an overview, Sketch asked his favorite non-tax lawyer to hit some of the high points of the first significant reform of the U.S. tax code since 1986.
Note: No tax advice is presented below, only issues you may want to explore.
Tax Rates – As architects, Wood & Brix gets a break – unlike other service-industry businesses where the success of their business depends upon them and not something they sell – that permits income from his pass-through limited liability company to be taxed at individual rates closer to the new flat 21 percent tax rate for corporations. Oversimplified, it allows a 20 percent deduction of qualified business income, with predictable limits. BUT, the computation and application is not for the faint of heart. For example, check out this Forbes article.
Employee Paychecks – Check out the possibility of change to what you withhold from employees’ paychecks. As much as 28 percent of federal tax may be automatically withheld on any bonus, commission, or supplemental wages, up from the current 25 percent rate, as noted by concerns reportedly expressed by the American Payroll Association.
Entertainment Expenses – Wood & Brix can no longer deduct expenses for activities “generally considered to be entertainment, amusement, or recreation,” such as membership dues for business, pleasure, recreation, or other social purposes. That includes his sports tickets.
Sexual Harassment Lawsuits – New Jersey Democratic Senator Bob Menendez’s amendment born of the #MeToo movement passed to deny companies any deduction for settlements, payouts or attorney’s fees related to sexual harassment if the payments are subject to non-disclosure agreements. The tide rolls.
Bonus Depreciation – Generally, businesses can immediately deduct 100 percent of the cost of eligible property in the year it is placed in service, and is not limited to new property.
Paid Family Medical Leave – Wood & Brix can claim a credit of 12.5 percent of wages paid to a qualifying employee during family and medical leave if he is paying 50 percent of normal wages.
Mavericks – Those Individuals Who Own Businesses
State and Local Tax Deduction Capped – Texans paying property taxes are limited to the first $10,000, if they are still itemizing their taxes.
Standard Deduction Essentially Doubled – Reducing the number of people who itemize their taxes by raising the standard deduction for single filers from $6,350 to $12,000; for married couples filing jointly, from $12,700 to $24,000.
Tax Preparation Eliminated – Taxpayers are no longer permitted to deduct the cost of having their taxes prepared by a professional, or the money spent on tax preparation software.
Health Insurance Mandate – The penalty provisions of the individual mandate under the health law, which are set to go into effect in 2019, were eliminated.
Child Tax Credit – Doubled to $2,000 for children under 17 and availability is expanded to single parents making up to $200,000 and married couples up to $400,000.
Moving Expenses – Unless you are military, the deduction for the cost of your U-Haul when you move for work is gone.
Estate Taxes – Currently estates worth less than $5.5 million can be transferred with no tax. Until 2026 that base roughly doubles to $11 million.
Tilting the Scales in Your Favor
For many small businesses and their Maverick owners like Wood & Brix, there are a myriad of tax code changes that affect your business and you individually – both for the good and the bad.
- Educate yourself.
- Check with your tax attorney and tax accountant early in the year to ensure that you and your business maximize your position – well in advance of December 2018.