Small business owners wear many hats, including management, human resources and finances. It is not uncommon for small business owners to exclusively pay attention to tax brackets without considering other important issues. Without a dedicated tax professional, they may overlook important tax law changes. Neglecting changes in tax law can result in a costly 2019 filing season. Business owners should consider these questions in the new year.
Can you claim a new small business deduction?
Some small business owners can deduct 20 percent of qualified business income if they are in a partnership, are a sole proprietor of a business or an owner of an S corporation. You may be able to claim this new deduction if you earn less than $157,000 as an individual or $315,000 as a married couple. Some business owners, especially those who own multiple corporations, earn over this bracket. If you earn more than the threshold, then you may still be able to claim a partial deduction.
As with many business tax issues, the specifics are complicated. Deductions may depend on the type of services that your business provides. Employee compensation can also impact the amount of the deduction. Deduction calculations become increasingly complex the more businesses that a person owns.
Is it better to incorporate?
Corporate tax rates are down by 14 percent, so many business owners wonder if they will save money by converting other types of businesses into C corporations. The answer depends on your unique situation, but business owners who plan to take their ventures public may benefit from switching. In most cases, however, it makes sense to keep the partnership, proprietorship or S corporation as is.
High earning companies classified as C corporations are taxed based on their income. Business owners who are shareholders pay tax on dividends. Ultimately, owners may pay double the taxes, eliminating savings.
Do you know about other changes in the law?
There are several other changes that small business owners should consider, highlighted by the IRS. Excess business losses and net operating losses are taxed differently. While changes in tax law mean that businesses can no longer deduct entertaining clients, the IRS still considers meals 50 percent deductible in 2019.
Businesses can expense more under new laws, including for certain types of property. Consider new rules for fringe benefits and like-kind exchanges. Employers who provide paid family and medical leave in 2019 may also qualify for a new business credit. Specific industries, including farming and insurance, face changes as well. Due to continually evolving tax laws and the expensive repercussions of ignoring those laws, it is important for business owners to consult tax professionals or tax law firms to ensure compliance.