2018 Tax Changes (Explained as Best as Humanly Possible)
To put it very (very) mildly, the new tax bill is not without its problems. In their newsletter attempting to explain the new bill's changes, the American Institute for Public Bookkeepers (AIPB) wrote, "Warning: You are encouraged to wait, where possible, for IRS guidance to confirm the details below. There are many technical errors in this tax law."
We have tried our best to explain how a few of these various changes might affect your business. In the interest of keeping this an article and not a book, we'll be summarizing many of the details, with links to articles where each piece can be expanded upon in greater depth.
To begin, here are a few of the easiest changes.
Mileage rates. The standard business mileage deduction has been raised from 53.5 cents per mile to 54.5 cents per mile.
Listed property. Computers and peripherals are no longer listed property, and therefore do not have to be held to the same proof of exclusive business-use standards as, for example, vehicles.
Meals & Entertainment. From 2018 through 2025, on-premise meals for employees will be reduced from 100% deductible to 50% deductible. As of 2026, they will no longer be deductible at all. Most entertainment expenses are no longer deductible.
Getting a bit more in-depth...
Income from pass-through entities. Anything other than a C-Corp is now considered a pass-through entity (including S-Corps). Pass-through deductions on individual returns are also significantly changed, particularly for those higher-income earners in the fields of law, accounting, medicine, consulting, athletics, financial services, and brokerage services. More details can be found here, Can You Win From the Pass-Through Deduction?, and more details on other lines of businesses to be affected will hopefully be explained by new IRS amendments and regulations.
C-Corp income. You may already be aware that taxes for C-Corps have been significantly reduced, to a flat 21%. However, the deduction for dividends received from other corporations has also been reduced from 70% to 50% for most dividends, and to 65% for those dividends which had been previously deducted at 80%.
Depreciation changes. This is another area that has received a lot of coverage, as the changes here are extensive. For starters, tangible personal property has been expanded to include property primarily used to furnish lodgings and improvements to nonresidential real estate. (If you're in the hotel business, this should be very exciting news for you.) Furthermore, Section 179 and bonus depreciation have been increased, with new rules not only applying to 2018, but also to property purchased in 4th quarter 2017, or purchased before 4th quarter 2017 but not put into use until 2018. Unfortunately, most of the bonuses expire in five years. Forbes has a great write-up of these changes, Tax Geek Tuesday: Changes To Depreciation In The New Tax Law.
Business interest expense and income. The business interest deduction is now capped at 30% of income (excluding depreciation) and can be carried forward for five years. Small businesses are exempt if they have less than $25 million in annual gross receipts, or are cash-basis. It also does not apply to "any taxpayer in the business of being an employee" (IRS clarifications hopefully coming soon), or to real property/real estate businesses. Business interest income also no longer includes interest from investments.
And the information we either don't have, or which is too long to list here.
FITW. For starters, federal income tax withholding tables are not yet available, but are scheduled for this month, to be used for employee wages as early as February. These could mean for some significant changes in employee take-home pay, but we won't know exact details until they are released by the IRS. This can be a bit of a headache for small businesses handling their own payroll; if you are not currently using a payroll service provider, now might be a good time to research those options.
Fringe benefits. Many fringe benefits which previously counted as deductions for employers will now no longer be deductible. Additionally, certain expenses are no longer deductible for employees, as well (in particular, un-reimbursed business expenses). See The New GOP Bill and What It Means for Employee Benefits in 2018 for a list of the eliminated benefits.
With all of the changes to tax law in 2018, it's dangerous to try and navigate on your own. Talk to your accounting professional about how these changes will affect your business.
Staying (Financially) Fit Over the Holidays
With Halloween only 12 days away, we are officially in the holiday season. This is my favorite time of year, and I understand the temptation to let work slide as I give into the distraction of Thanksgiving, Christmas, and vacation.
But holiday season coincides with year-end and, for businesses, this needs to be a time of focus. Just as it's easy to undo months of dedicated diet and exercise with the wild abandon of the holidays, it's easy to let your business financials slip at the time when you really need them at their peak.
Here are a few common bookkeeping issues we see in Q4 year after year, and how to avoid them.
Missing Deductible Expenses
The holidays are a great time to let loose and be more sociable with co-workers, clients, and referral partners. But just as you lose count of how many calories you're taking in, you can lose track of the money you're spending. Not only can this result in overspending, of course, but you can also be missing out on deductible expenses that will save you money in just a few months at tax time.
Perhaps you're planning an office Christmas party for your staff. Not only would those expenses be deductible, even food purchased for a potluck, but any staff appreciation gifts you'd like to hand out, as well. The same goes for client or vendor appreciation gifts. (If you have someone external doing your books, be sure they're asking about purchases for things like massage gift cards and fruit baskets, and recording them as business expenses, not draw activity.)
Many networking groups hold a special holiday party. Not only would any food and drink you purchase for that be deductible, but also mileage to the event. If you're having trouble keeping up with your mileage, something as simple as a mileage log (free to download here) in your vehicle or as sophisticated as an app can do wonders to help you track that.
Whatever you do, be sure you're keeping proper record of your business expenses, even while you party it up.
Falling Behind on Bookkeeping
Between parties, travel, and employees being out sick from all the germs they picked up partying and travelling, it's easy for certain tasks to get a bit behind in the later part of the year. However, bookkeeping is not like cleaning the house; you can't just plan to catch it all up at once. If I don't clean my house for a month, it's not that much more difficult, proportionately, than if it's not cleaned for a week. Bookkeeping doesn't work that way. If your bookkeeping takes four hours a month and you fall three months' behind, you now have twelve hours worth of bookkeeping to do. (And finding twelve hours for a task you like is difficult enough; imagine trying to find half an entire day to dedicate to a task you dislike.)
Many business owners who find themselves in the position of staring down months of untouched financials make the decision to get some outside help, just to catch things up. The problem is that they're in good company. Beginning in November, professional bookkeepers get very busy with new clients who are hoping to get their books cleaned up for year-end. Not only is there an influx of new clients, but existing clients continue to need service, and we're busy getting all of their year-end documents ready as well. Many of my friends who work solo or operate smaller firms do not take on any new work during this time of the year.
If you aren't certain that you'll be able to keep up with your financials on your own during the holiday season, begin seeking assistance now, before you get too busy.
Not Preparing for Next Year
(NOTE: If you are one of those people who files an extension out of habit, this is for you.)
You may not realize it, but there is a lot you can be doing right now to get ready for next year's tax season.
Just like you don't have to wait to make a New Year's resolution to start getting fit, you don't have to wait for January 1st to start getting your books in shape for tax season. For starters, you can be preparing for the January payroll reporting rush. In the chaos of year-end, many business owners forget that 1099s and W-2s are due at the end of January, and not in April. To prepare, you can be sure that you have W-9s, W-4s, and any required state tax documents on hand now, instead of trying to get them from workers later. (This is especially true of 1099 contractors, as they may work for you for a much shorter season and can be harder to track down later.)
If you have been using an outsourced payroll system, be checking now to ensure that the payroll reports in your financials match those provided by the vendor. Sometimes errors do occur, and you will need to alert the payroll company right away if their totals are incorrect. (Like bookkeepers, they are getting very busy this time of year, too.)
You want to check to make sure that your sub-ledger totals, such as your Accounts Receivable and Accounts Payable, match your General Ledger balances. You also want to be sure that you are up-to-date on any reconciliations.
Finally, it's a good idea to take some additional tax-sheltering steps. For example, if you had a good year and are cash-basis, consider making a large business purchase in December instead of January, to reduce your taxable income. Or maybe you have not been paying enough into your withholdings or your quarterly estimated self-employment taxes, and need to increase those in December. There are many options available to you, but you need to act now.
Fortunately, you still have some time to make the most of your holiday season. Stay on top of your books as you go, and you will have a restful and relaxing January (at least compared to everyone who didn't put in the work during December). If you need help, we are always available.
The 3 Most Common MLM Tax Myths
Multi-level marketing companies (MLMs) have exploded over the last decade. Tens of millions of Americans participate in MLMs or "network marketing". There have been countless articles written over both the potential risks and successes of these companies, so we're not going to dig into that debate. The fact of the matter is, like with any industry, some people make money in multi-level marketing, and some people don't.
What we are interested in, however, is the preponderance of tax myths we see bandied about when it comes to network marketing. New MLM participants are often encouraged to take advantage of myriad deductions that will open up when they start their own business, and are promised significant tax savings.
Unfortunately, it's our responsibility to set the record straight on that.
Here are the three (inaccurate) MLM tax beliefs we see most frequently...
If you put an advertisement on your car, all your vehicle expenses are deductible!
If this was true, every person should just file a d.b.a. and slap the name of their "company" on their vehicle, because the tax savings would absolutely be worth it. Unfortunately, it's not true. However, we still talk to many new clients who have heard this.
This myth is so pervasive, in fact, that the IRS put out a special note on it in their 2016 version of Publication 463 (which pertains to transportation deductions). A vehicle wrap is not a free pass for the government to pay for all of your fuel purchases for the year.
However, the cost of the car advertisement itself is fully deductible as a marketing expense. Also, your business mileage (excluding commute) is still deductible.
You can write off all your meals!
Don't go crazy on eating out, thinking you'll get it all back at the end of the year.
For one thing, business meals are limited to those which are not considered "lavish or extravagant". For another, except for under very specific conditions, meals are only 50% deductible. So you can still lose a lot in meal expenses if you aren't careful.
Also, don't try to classify every meal as a "business" meal. Meal deductions are frequently abused, and can show up as a "red flag" to the IRS.
It doesn't matter if you aren't making money...Just write off the loss!
Bad news: The IRS isn't dumb.
There was an actual case that came about due to a couple who were involved with Amway as a hobby. They threw extravagant parties for their friends, ostensibly for the purpose of selling Amway products, and claimed the losses on their taxes each year. That's when the IRS came in with hobby law.
Hobby law specifies the conditions under which your business can be reclassified as a "hobby". There are various criteria involved, but one major aspect is failure to turn a profit year after year. Regardless of the type of business, if your business is facing long-term failure, that is a problem.
If you have questions about how to handle your MLM business's accounting, don't take the word of your friends or upline. Talk to a professional, so you don't run into trouble.