For many Americans, taxes can be scary. Internal Revenue Service rules are complicated, they change constantly, and any mistake you make can cost you big bucks. Are the tax requirements different for big corporations, small businesses and sole proprietorships? What if you have a home office or you rent a private office in a coworking space?
The changes to the tax laws that took effect this year may or may not have affected you depending on a variety of factors, including how you file (single, married, married filing separately, etc.) and how much money you make. In addition, the type of business you run, the amount of money your spouse makes (if you have one) and the amount of wages you pay to employees (if you have any) could affect which rules apply to you. But it’s still a good idea to be aware of them and to discuss them with your accountant when you’re filing your business taxes.
The Tax Cuts and Jobs Act has been criticized by many as giving huge tax breaks to big corporations and shifting the burden onto the working class. But regardless of where you fall on the spectrum, and whether you will benefit from the new rules, you must follow them — at least until they change again.
What changes do small businesses need to know about?
1. Losses. Calculating a net loss is not simple. Many variants come into play, including business and nonbusiness deductions, charitable contributions, contributions to a retirement account and more. It’s important to include all expenses and deductions in the formula, because leaving any out could affect whether your bottom line is negative or positive. This figure can also carry over to future tax years.
The new tax laws for small businesses put limits on what the IRS terms “excess business losses.” This means you can’t automatically deduct the total amount of your loss. The maximum a single taxpayer can deduct is $250,000; a married couple can deduct $500,000.
Previously, when an individual suffered a net loss, they could recalculate the two previous tax years to offset their liability (known as a carryback). Any business started before Dec. 31, 2017, is grandfathered and these businesses will still be allowed to carry back. However, any business started after that date will no longer have this privilege.
All businesses will still be allowed to carry losses forward, however.
Additionally, individuals will no longer be able to deduct 100 percent of their losses. Instead, they will be allowed to deduct only 80 percent.
These changes could be potentially devastating to a struggling small business. Forbes reports that only half of all small businesses survive their first five years, and only one-third make it to ten years. These changes to the tax laws may bump up the failure rate.
Other deductions that were previously allowed but are no longer include:
Expenses related to sexual harassment cases
The cost of legal fines and penalties
Some meals and entertainment expenses
That last one has a number of nuances. Previously, business owners could deduct many types of food and entertainment expenses, but these are now limited. For instance, the IRS says you can deduct 50 percent of the cost of a meal expense with a client, but only if you are present for the meal. A further stipulation says this only applies if “the food or beverages are not considered lavish or extravagant.” The IRS does not go on to describe what it considers lavish or extravagant.
2. Depreciation. This part of the tax laws that has changed is mostly good news for small businesses, because they are now allowed to deduct 100 percent of the expense of some assets, versus the 50 percent previously.
In 2001, the government instituted a new tax law called bonus depreciation. This law allowed businesses to take a bonus deduction in the year they purchased equipment. But there were caveats. The equipment had to be new, and it had to be expected to last 20 years. In a way, this law seemed better suited to farmers than small-business owners, because your PC is not going to last 20 years, or likely even five.
Worse, the law was scheduled to reduce the allowed expense from 50 percent to 40 percent in 2018. But instead, the new law increased it to 100 percent! Additionally, small business owners are now allowed to include used equipment as well.
3. Accounting methods. The new tax laws allow any small business earning less than $25 million per year the option of using cash-basis accounting. Cash-basis accounting allows business to count income and expenses when they happen, versus accrual accounting, which counts income when it is earned and expenses when they are billed, regardless of when (or if) any money changes hands.
The biggest benefit to cash-basis accounting is that it is simpler and requires less work. Counting the money only when it comes in or goes out is also beneficial in other ways as well.
One is that it’s easy to see how much money a small business has at any given time. Counting money as income when it is merely billed and not yet paid can give a small business a false sense of security. And while bills that remain unpaid can sometimes be written off as losses, it’s a small consolation that’s a long time coming.
The cash-basis accounting method is also helpful at tax time, since a small business doesn’t have to pay taxes on income until it is received.
When a business uses the accrual method of accounting, however, it can often get a clearer picture of how the business is doing. It’s like looking at your bank balance before payday — it might look grim, but it’s about to get a big infusion.
On the other hand, using this method can make a business look flush when it is not. Counting what you are owed versus what you have been paid produces markedly different results.
Accrual accounting is a little bit like counting your chickens before they hatch. However, it helps if you can accurately predict how many of the eggs will hatch. Are your chickens sitting on them diligently? Or have the eggs been left unattended? Your level of optimism and point of view will matter in such calculations as well.
For a fuller explanation of all the changes to the tax laws that may affect corporations and businesses, take a look at IRS publication 5318, Tax Reform What’s New for Your Business. This 12-page document talks about the corporate tax provisions, depreciation, losses, exclusions, deductions, credits and more.
This publication is especially helpful if you do your own taxes, but it’s worth reading even if you use an accountant. Everyone wants a knowledgeable accountant they can trust, but the truth is that not all of them are top-notch. You never want to just hand all your documents over to a stranger and hope for the best. The more information you have, the better-prepared you are to make smart business decisions.
Private Office Space Boosts Revenue
As a small-business owner or sole proprietor, you are faced with a host of expenses. To be successful, you must work to keep revenue up and expenses down. One of the best ways to save on expenses is by renting a private office in a shared workspace.
You may think that you are saving money by having a home office, but do the math. Are you trying to grow your business? If so, you are not likely to impress your potential new clients with your residential address and your dining room office.
If you’re serious about getting new clients and improving your bottom line, a big part of the answer is to get your own private office in a nice building with a respectable address. Often, quarters in shared and coworking spaces are more affordable than leasing your own office space. Plus, there is no commitment! You can rent for a month, a week, a day or even an hour.
Your potential clients will be impressed with your well-appointed private office space and will see you as the consummate professional that you are.
Reap the rewards of the many ways you can cut expenses, be it by taking advantage of the new tax laws, renting temporary private office space or being more frugal with expenditures. Contact Premier Workspaces today and find out how we can help.