What small business owners need to know, with Geni Whitehouse and Jan Haugo
Few business requirements elicit confusion and anxiety quite like taxes. In our ongoing effort to provide insight and advice for small business owners, we sat down with distinguished financial consultants Jan Haugo and Geni Whitehouse to discuss the latest tax considerations and strategies. In this installment, Haugo and Whitehouse discuss the new tax law and how it can affect small business owners.
Major tax reform, known as the Tax Cuts and Jobs Act (TCJA), was approved by Congress on December 22, 2017. Many small business owners are wondering how this sweeping legislation will affect them, and what adjustments they need to make to minimize their tax liability.
Truth be told, the new law is proving vexing for even the most seasoned tax professionals, many of whom are struggling to wrap their heads around its intricacies and ambiguities.
“I’m still digesting the new tax rules,” admits Jan Haugo, bookkeeper, small business owner, and one of the Most Powerful Women in Accounting according to CPA Practice Advisor. “There are benefits for small businesses, but there are also a lot of gray areas.”
“There are benefits for small businesses, but there are also a lot of gray areas.”
“The new tax law is very complicated, especially for pass-through entities,” says Geni Whitehouse, accountant, author, and one of the 100 Most Influential People according to Accounting Today. “There are some strange provisions that will benefit some small businesses but not others.”
At stake is a new 20 percent deduction for owners of pass-through entities, which include sole proprietorships, limited liability companies (LLCs), partnerships, and S corporations. According to The Wall Street Journal, the tax break effectively lowers the top rate for these businesses from 39.6 percent to 29.6 percent.
But there are nebulous restrictions.
“Many of the restrictions are aimed at consultants, which is not well defined,” says Haugo. “Are web designers and freelance writers consultants? It’s unclear. Are lawyers, accountants, and brokers consultants? It’s unclear.”
One thing is certain. Itemized deductions are being replaced by standard deductions. For pass-through entities, it’s the lesser of two things: 20 percent of business income or 50 percent of total wages. What should be a simple calculation can lead to confusion.
“Some small business owners think they can stop paying themselves and get a big deduction, but they must consider total wages,” Haugo explains. “Let’s use a $2 million company with $500,000 in employee wages as an example. Some think they will get a $400,000 deduction, which is 20 percent of $2 million, but their actual deduction is $250,000 because of their employee wages.”
The new tax law contains a number of changes, both large and small.
Meals for business purposes can still be deducted, for example, but entertainment cannot. If you take a client to a ballgame, you’ll have to separate the cost of the tickets from the cost of the hot dogs. And a simple receipt won’t suffice. You’ll need to be prepared to provide the date, location, attendees, business purpose, and what was discussed for every meal that is deducted.
“There are a lot of things you can no longer deduct, like state and local taxes,” says Whitehouse. “And there are additional changes related to asset investments.”
She and Haugo both recommend seeking advice from a tax professional who can help navigate the new law. First and foremost, an advisor can help determine the most advantageous business structure—whether an LLC, S corporation, C corporation, or other designation—for tax purposes.
“You have to understand the full picture, especially if you separate personal and business taxes or if you have more than one business.”
“You have to understand the full picture, especially if you separate personal and business taxes or if you have more than one business,” says Whitehouse. “Depending on the situation, it might make sense to reallocate earnings, properties, or assets among taxpaying entities.”
Some small businesses may want to transition from accrual- to cash-based accounting, she adds, which is another big shift from established practices.
“You really need to reconsider your entire tax situation,” Whitehouse insists. “If you have different accountants for personal and business purposes, choose one so they can see everything and strategize across it all. Or at least get both accountants in the same room.”
About Geni Whitehouse
Geni Whitehouse, CPA, divides her time between working as a winery consultant at Brotemarkle, Davis & Co in the Napa Valley and writing, speaking, tweeting, and posting at EvenANerd.com. She is a co-founder of Solve Services, a remote bookkeeping business for the wine industry, and the author of “How to Make a Boring Subject Interesting: 52 ways even a nerd can be heard,” which is available on Amazon.com. Geni is a regular keynote presenter at CPA and technology conferences around the country, and was curator and inaugural speaker at the TEDxNapaValley event series. She has been named one of the 100 Most Influential People (Accounting Today), a Thought Leader in Accounting (CPA Practice Advisor), and one of the Most Powerful Women in Accounting (CPA Practice Advisor).
About Jan Haugo
Jan Haugo is an accountant, small business owner, and former CEO of the Institute of Certified Bookkeepers in the United States. She founded Jan Haugo & Associates in 2000, which offers bookkeeping and accounting services to small businesses in the Phoenix area. Jan utilizes cloud-based accounting products and technology applications to support her clients and enhance their collaborative workflow environments. Her unique, integrated approach of working with business, banking, and investment specialists helps align the efforts and outcomes of each client’s extended support team. In addition to leading her own firm, she also works with Kansas, MO, firm MarksNelson CPA, where she serves as a supervisor, implementing cloud solutions with their Entrepreneurial services division. According to CPA Practice Advisor, Jan is one of the Most Powerful Women in Accounting.
Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.