Commonly overlooked tax savings for financial professionals

As with any profession, it is important that financial professionals keep up with the latest industry news, including how ever-evolving tax laws affect your business. While taxes can’t be escaped, there are ways to help cut down the bill. When it comes to managing and lowering your own firm’s tax situation, remember these tips based on the Tax Cuts and Jobs Act of 2017 (TCJA) that will affect you now and in the future, in addition to the latest tax reform for small business from the IRS.

Double check the latest deductions
With tax reform under the TCJA, your business expenses may be taxed differently than before. You’re still allowed to write off standard business expenses, such as marketing, business equipment, employee costs and financial planning software. But here are five tax deductions for small business that could change how you file:

1. Depreciation of assets:  Under the TCJA, small business owners can immediately write off more property expenses, and that includes certain improvements to a building’s interior, roof, HVAC systems, fire protection systems, and alarm and security systems. What’s more, the deduction ceiling increased from $500,000 to $1 million. In the first year, businesses can also deduct 100 percent of the cost of certain business assets, that generally includes equipment, machinery, computers, appliances and furniture. The 100 percent allowance begins phasing out after the 2022 tax year and expires January 1, 2027.  
2. Accounting method: Businesses with an average of less than $25 million in profits for the last three years can use the cash method of accounting, so your taxes can reflect only real profits.
3. Meals and entertainment: While entertainment expense deductions have mostly been eliminated, you can still write off 50 percent of client meals, if you stay within specific IRS criteria.
4. Employer credit for paid family or medical leave: Business owners can deduct up to 25 percent of wages for qualifying employees for up to 12 weeks per taxable year. There are specific rules for calculating the percentage, so consult your tax advisor. Thanks to the Consolidated Appropriations Act of 2022 (CAA), this tax credit extends through 2025.
5. Commuting costs: The TCJA cuts any tax deductions for commuting costs for you and your employees — with one exception. If any of your employees bike to work and you have a program in place to reimburse them for their bicycle commuting expenses, those costs can be deducted from now through 2025.

Reassess your business entity
Perhaps the biggest change with this tax reform relates to how you set up your business. Self-employed financial professionals who earn less than $170,050 in tax year 2022 (or $340,100 for those filing joint returns) can potentially qualify for a 20 percent qualified business income (QBI) tax deduction.

If your business is structured as an S Corp, that doesn’t necessarily require you to pay additional business taxes on top of your personal taxes. So, if you are in the top income bracket, which has a 37 percent tax rate, then your personal tax rate will top out at 29.6 percent after the 20 percent reduction. Likewise, if your business is set up as a partnership or sole-proprietorship LLC, which also usually act as “pass through” entities that don’t require ownership taxes, you may qualify for the 20 percent deduction.

If your business is a C Corp or another structure that requires business taxes, you won’t qualify for the 20 percent deduction, but there may be other cuts designed for corporations that could decrease your tax burden. TCJA requires a flat 21 percent tax for C Corps, on top of your personal taxes.

 You may want to consider if your business entity is still the right choice to help you save the most on your taxes. There are also TCJA rules on business losses, interest expenses and alternative minimum taxes in addition to these deductions. 

Two things you can do today

1. Read "The Highlights of Tax Reform for Businesses" from the IRS and review your business deductions from last year with your tax advisor.
2. Review the structure of your business entity against the newest IRS and Small Business Administration guidelines.

With changes that came resulted from the Tax Cuts and Jobs Act and some deductions potentially expiring, consulting with your tax advisor is the best way to make sure you aren’t missing out on any tax savings.

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