Commonly overlooked tax savings for financial professionals
Financial professionals are like many small business owners: They always have taxes in the back of their mind. Of course, as with any profession, it’s important to keep up with the latest industry news — including how ever-evolving tax law affects your business. 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.
Double check the latest deductions
With the TCJA laws, your business expenses may be taxed differently than before. However, you can still write off standard business expenses, such as marketing, business equipment, employee costs and financial planning software. Here are five changes you should understand and consider:
- Meals and entertainment: While entertainment expense deductions have mostly been cut to zero, you can still write off 50 percent of client meals, if you stay within specific IRS criteria.
- Depreciation of assets: Small business owners can immediately write off more property expenses under the TCJA. You can deduct 100 percent of the cost of certain business assets in the first year, and the TCJA also increases the deduction ceiling from $500,000 to $1 million.
- Accounting method: Businesses with an average of less than $25 million in profits for the last three years can now use the cash method of accounting, so your taxes can reflect only real profits.
- Transportation costs: The TCJA cuts any tax deductions for commuting costs for you or your employees — with one exception. If you have a program in place for your employees to get reimbursed for expenses so they can commute via bicycle, those costs can be deducted.
- Employer credit for paid family or medical leave: Business owners can now deduct a percentage of wages for qualifying employees for up to 12 weeks per taxable year. There are specific rules for calculating the percentage, which has a maximum of 25 percent, so consult your tax advisor.
In addition, there are TCJA rules on business losses, interest expenses and alternative minimum taxes that you should review with your tax advisor.
Reassess your business entity
Perhaps the biggest change with the 2017 tax laws, however, is how you set up your business. Self‑employed financial professionals who earn less than $157,500 (or $315,000 for those filing joint returns) can potentially qualify for a 20 percent deduction on what the IRS calls qualified business income (QBI).
If your business is set up 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 it is reduced by 20 percent. 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 may decrease your burden as well. TCJA requires a flat 21 percent tax for C Corps, on top of your personal taxes.
Two things you can do today
- Read "The Highlights of Tax Reform for Businesses" from the IRS, and review your business deductions from last year with your tax professional.
- Review the structure of your business entity against the newest IRS and Small Business Administration guidelines.
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