[This article has been updated to reflect the new tax law that went into effect on January 1, 2018]
Are you overpaying your small business’s taxes? One of the major reasons small business owners (including me) hate paying taxes is the mystery of it all.
The rules are complex.
The tax code is enormous.
The forms are onerous.
Even with the help of tax preparation software, most of us still aren’t entirely sure that we’re taking full advantage of the law.
“Isn’t there a loophole somewhere?” I frequently get asked.
“Isn’t there anything more to be done?” others plead.
We hand our numbers over to our accountants and they work their strange magic, and we trust that they know every conceivable way to save us money.
But the fact is that accountants don’t know it all. The code really is too complex and large. Most accountants have many clients and work by the billable hour. They are required by their state to get continuing professional education, but every hour not doing billable work is costly, so there’s less motivation to research, study, and learn all the nuances of the tax code.
Does that make you nervous that your accountant could be missing something big?
Don’t be. The fact is that, for most small businesses and individuals, even though the tax code is complicated, most tax returns are not. Unless you’re involved in some type of complex overseas deal (you’re probably not) or hiding money illegally (you’d better not be), the typical tax return of a small business is fairly simple and repetitive.
You have revenues and expenses; they net to profits. Maybe some personal expenses could be argued to be business-related. Maybe there are a few rules, like inventory valuation or depreciation, that apply to you or your industry. But after the first year or two of tax return preparation you’re going to see that it’s pretty much the same each year after — the same types of businesses tend to take the same types of deductions and claim the same types of expenses, and the only thing that changes are the specific numbers.
So, does this mean that you’re stuck? That you have no options? That you’re doing everything possible to pay the least amount of taxes? Probably. But there is one thing you can do just to make sure: Get up to speed on the latest changes in the tax laws.
The Tax Cuts and Jobs Act of 2017, which took effect on Jan. 1, 2018, offers a number of tax breaks and favorable tax changes that could affect your income taxes. Here are a few of the biggest changes that small business owners need to know about:
- Lower personal income tax rates. First of all, depending on your tax bracket, you might be seeing a significant reduction in your tax rate for 2018. According to analysis from the Tax Foundation, if you were a single filer with $100,000 of ordinary taxable income in 2017, you would have been in the 28% marginal tax bracket, but, in 2018, you’ll be in the 24% tax bracket — a nice little decline of 4% in your marginal tax rate.
- 20% deduction for pass-through entities. Most small businesses operate as pass-through entities (LLCs, partnerships, S corporations, or sole proprietorships) where the company itself does not pay taxes, and the business income “passes through” to the business owner’s personal tax return. One of the biggest benefits of the new tax law for small business owners is that there is a 20% deduction for business income from pass-through entities (so long as your business is not a professional services firm with taxable income of more than $157,500 for single filers/$315,000 married filing jointly). Talk to your accountant to make sure you qualify for this 20% deduction, as it can make a big difference in your tax savings — and consider setting up your business as an LLC or other qualified pass-through entity if you haven’t already done so.
- Expanded Sec. 179 deductions. Buying property and business equipment is a major business expense for many small companies, and the new tax law just made your life easier by offering an expansion of the popular Section 179 deduction: It increases the Sec. 179 expensing cap from $500,000 to $1 million. The tax law also gives business owners more options for types of property claimed as business expenses, such as beds, refrigerators, new roofing, HVAC systems, security alarms for commercial buildings, and more. See if your business can claim some new business expenses this year — or get bigger tax savings out of an existing deduction.
And even if you’re confident that you totally understand the new tax law, and that you’re already making all the right moves to be ready for next year’s taxes, you still have another option: Get another opinion about your tax planning.
If you’re preparing your tax return yourself or using tax prep software, take your prior year returns to a Certified Public Accountant (CPA) and ask to be audited. If you already have a CPA, then take those same prior year returns and give them to another CPA and ask to be audited. You want a new set of eyes. You want someone to go through those returns being objective. You want a different perspective. Make sure the reviewing CPA knows that you have no specific expectations. Oh, and pay him or her. Getting this additional CPA audit might cost you a few hundred or even a thousand bucks. But it’ll feel worth it.
If the CPA does find something substantial that could save you money on taxes, then you’re going to want to understand why your current CPA (or tax prep software) isn’t identifying the same savings. You might decide to switch CPAs or start using the new person — that’s up to you. If the CPA does an audit and comes up with nothing new, then your money is still well spent. You’ve gone through the necessary due diligence to make sure you’re maximizing your tax situation. You’re performing a good, fiduciary duty to your shareholders, even if you’re the only shareholder.
Is this being disloyal to your current service provider? No. It’s being a good and responsible manager. Regardless of the outcome, bringing in an outsider — a competitor — to audit your tax returns, your insurance policies, or your computer network is something I see smart business owners doing all the time. You’d get another opinion from a doctor, right? So what’s the difference?
Join writer and small business owner Gene Marks each Wednesday on the Small Biz Ahead podcast. You can submit a question for Gene to answer on the podcast.