Experts look ahead to the upcoming tax-filing season
There’s much speculation about what tax changes could occur for business owners under a new presidency and administration.
President Donald Trump has proposed various versions of his tax plan in the past months after feedback from lawmakers. Some tax preparers and accountants have a wait-and see attitude, while others are encouraging their business owner clients to move forward with expenses and purchases this year to receive the most deductions they can now in case changes affect their ability to receive the same amount of benefit during the next tax year.
“I’ve actually told business owners: ‘Let’s get together in November or December because we might have an idea of what some of the rules might be,’ ” says Kirk Bond, a tax preparer with Accounting & Tax Professionals in Grimes.
“Everything right now could change,” he adds. “They’ve done that before where they’ll push through changes, and we couldn’t file
anyone’s taxes until February.”
Bond says he thinks any changes Congress approves yet this year will go into effect for 2017, while others say there isn’t enough time to make that happen.
Changes to the tax code and tax laws are usually discussed with every change in administration, local accountants and tax preparers say, but a large-scale reform rarely happens. The last one was during President Ronald Reagan’s tenure in office.
“What’s pretty common is they’ll talk about it, but then the changes aren’t very dramatic,” Bond says.
Here are four things for business owners to consider when it comes to their taxes.
1. Do I need help?
Business owners will need the help of a professional accountant or tax preparer to ensure they do what’s financially best for their business, says Todd Thorson, who is chairman of the taxation committee for the Iowa Society of CPAs. He’s also a certified public accountant and partner with BKD LLP in West Des Moines.
“Someone who’s not well versed in the rules could really miss out on different kinds of tax credits,” he says.
For example, farmers are eligible for specific credits tied to the environment; business owners who hire veterans or specific classes of employees also are eligible for credits.
“They may already be hiring these people and not be aware of it,” Thorson says. “They could be taking advantage of these credits.”
Regardless of whether they file their taxes themselves, work with a professional or do both, business owners should still have a grasp on the tax code changes that take place each year so they can make better decisions for their business, according to National Funding, a San Diego small business loan and equipment leasing company.
“It’s a very confusing subject,” says Lance Dieleman, a senior account manager with Schuring, Uitermarkt, Sims, McCleish, Ver Meer P.C. in Urbandale. “They want to have a general idea of what’s going on.”
A professional can help business owners determine what is most important to their business and boil it down from there, he says.
Professionals also can prevent business owners from becoming victims of fraud. Dieleman says he has clients who say they have been contacted by the Internal Revenue Service via email or telephone. Those are fraud attempts.
2. What will happen?
While no one knows for sure if or when any overhaul could be approved, there are some changes that took effect for 2017.
One of the biggest areas that affects business owners is Section 179 of the tax code, which permits businesses to deduct as much as $510,000 for equipment that does not cost more than $2 million. Congress extended this deduction last year. Previously, they were required to spread the deduction out over the course of five to seven years.
“It really helps match the timing of tax savings with the out of pocket for the purchase of the original equipment,” Thorson says.
The state deduction amount replaces $25,000, and Iowa does not allow bonus depreciation. Bonus depreciation allows business owners to deduct 50 percent of the new qualifying property cost. This will remain in effect for 2017 but will reduce to 40 percent in 2018, 30 percent in 2019 and be eliminated by 2020.
Another issue that affects business owners is insurance costs. Small businesses with fewer than 50 full-time employees are not mandated to offer health insurance to their employees; however, there are tax benefits both to offering plans and having individual plans for the owner. Small business owners can still reimburse employees for their out-of-pocket medical expenses including health
insurance premiums even if they don’t offer them a plan and meet certain requirements.
“That’s a way to help small businesses still contribute to the medical costs,” Dieleman says. “It’s not taxable to the employee, and the business owner can deduct it (if they meet all requirements).”
For their individual plans, business owners need to consult with their tax professional to ensure they have a cost-effective plan and are utilizing any tax deductions they can receive from it, he says.
Business owners also need to remember that earlier filing deadlines went into effect for 2016 and remain in effect for 2018. This -means employers are required to file 2017 W-2s and 1099s for subcontractors and other non-employees.
“It’s a good reminder to make sure small businesses are ready for this again, especially if they weren’t ready last year,” Dieleman says.
3. How do I handle the unknown?
Thorson with the Iowa Society of CPAs says the association has advised its members to deduct as many expenses as possible in 2017 with the expectation that tax rates will be reduced in 2018.
Two examples of this would be paying bills on Dec. 31 instead of Jan. 1 or prepaying bills when possible, or making large purchases by the end of 2017 rather than waiting until the next year, he says.
“There really is some pretty substantial savings there by moving deductions into 2017 instead of waiting until 2018. We’ve been
pushing people we work with to do that,” Thorson says. “There’s no downside to doing that. It’s in everyone’s benefit to push as much into ’17 as possible.”
There’s discussion that deductions won’t be as high for corporations in 2018, which would mean less money saved for large purchases.
“We’re not going to know when it takes effect or to what extent (for a while), which is a problem for small business,” Dieleman says.
“There’s uncertainty, and there’s no clear definition of what the tax proposal looks like.”
4. Who could be affected by potential changes?
Business owners who operate under an S-corporation status could benefit with proposed changes in tax brackets. These
business owners are currently taxed at 35 percent. That number could be capped at 25 percent under Trump’s proposed tax plan.
This may encourage more entrepreneurs to incorporate their business as an S-Corp to take advantage of the reduction, Thorson says.
There also could be an influx in prospective business owners taking that next step if the tax bracket for business owners reduces to 20 percent from 35 percent.
“You might see a lot of people starting up a small business,” says Bond, the tax preparer from Grimes.
In addition, business owners who file their business income as part of their personal income may want to consider making large purchases in 2017. Part of Trump’s proposal doubles the standard deduction for personal taxpayers, which may mean business owners no longer see a benefit in deducting individual business expenses.
One of the initial Trump tax plans proposed eliminating the mortgage interest deduction. While that appears to be staying as of now, the part of the proposal that doubles the standard deduction could make taxpayers less likely to itemize their returns and claim the mortgage deduction. This could make home buying less attractive and weaken the housing market, real estate experts say.
The mortgage interest deduction allows taxpayers who buy homes to reduce their taxable income by the amount of interest they
pay on their mortgage.
Locally, Iowa has a 69 percent home ownership rate and is one of the strongest in the nation, according to Iowa Realty. The
Iowa Legislature this year approved the First-Time Homebuyer Savings Account, similar to a college savings account, where the money added to the account is tax deductible from the individual or couple’s state taxes.
Lawrence Yun, the chief economist for the National Association of Realtors, reports that homeowners have 45 times more net worth
than an individual who rents.
“Home ownership does matter,” says Anita Nemmers of Urbandale, a Realtor with Iowa Realty. “We should really promote home ownership in America.”
Changes to the tax law that affect mortgage deductions could cause some slack in home ownership versus renting, she says.
“From what the statistics have shown us, it could reduce quality of life and pride in the community, and it’ll affect the net worth of the
individual,” Nemmers says. “Statistically, renters aren’t as wealthy as someone who owns their own home and gets that tax advantage.”
The change could have a trickle-down effect into other industries including bankers who handle home loans and the trades industry,
which builds and conducts home repairs.
“It’ll affect all of those things that go into taking care of a home,” says Nemmers, who has worked in the real estate industry for 14
years. “You could see some people not as proud of their home, and you’ll easily see homes that aren’t kept up.” ♦