Almost halfway into 2018, there is still some uncertainty among small businesses about how best to plan for the tax structure in place for the year. But for many American small businesses, the new rules may be easier than they appear.
The Tax Cuts and Jobs Act was signed in late December and went into effect in January. Since then, professional organizations and Congress have been pressing the IRS and the Treasury Department for information that businesses can use to plan for the law.
“Here’s the bottom line: Estimated tax payments are due, but millions of small businesses don’t know how to estimate what they owe,” said Sen. Ron Wyden, D-Oregon, as he introduced Acting IRS Commissioner David Kautter at a Senate Finance Committee hearing in April.
Amy Wang, senior manager of tax policy and advocacy for the American Institute of CPAs, said that despite the lack of information, her organization’s members are still trying to help businesses plan for the tax year.
“They’re doing the very best they can with the very little — there’s no guidance — and they’re doing the best they can to plan ahead.”
The uncertainty was also seen in a March and April poll by the National Association for the Self-Employed, which found that nearly 88 percent of small business owners said they didn’t fully understand the impact of the new tax law on their businesses. More than 91 percent said the government didn’t adequately prepare them for the new tax system.
“That is still what we’re hearing,” said Keith Hall, President and CEO of the association, in an interview for this article. “I think there’s still some confusion.”
“The interesting thing, kind of a paradox, is now that we’ve gotten past April 15, people kind of lose track of the whole tax thing. They don’t worry about it until next year. And what we’ve tried to communicate to people is that the very essence of this new tax law is a tax cut that you need to plan for.”
In the same poll, close to 59 percent of small business owners said they thought their tax preparations would be harder because of the new tax law. More than 74 percent of business owners said they weren’t sure whether the amount of their first quarter estimated tax filings were higher or lower than last year because of the law.
Hall’s message to businesses: don’t delay. “Find a way,” he said, “because this will help your business, 100 percent guaranteed.”
Qualified Business Income Deduction
One of the important areas for which IRS guidance isn’t expected until summer is Section 199A, the Qualified Business Income Deduction for pass-through entities, including sole proprietorships, real estate investors, limited liability companies, S corporations and other entities.
That deduction is, in simplest terms, 20 percent for income from pass-through entities.
But many accountants and business owners aren’t sure how to calculate it, and how much of the deduction their particular business qualifies for, because the deduction is limited based on some factors, including wages paid, property values and business activities.
Hall acknowledged the complexity of the rules could present an obstacle to business owners, but he advises that many small business owners don’t need get hung up on them.
“If you’re one of those service provider organizations then your deduction is limited to ‘the greater of payroll versus…,’ and now you’ve just lost everyone, right?”
But those limitations don’t kick in until the qualified business income exceeds $315,000 for married couples or $157,500 for single filers.
“If you just go across the entire country, that is a vast majority of families,” Hall said.
Past those thresholds, it gets more complicated: the deduction is limited, based on wages paid and property owned by the business, and on businesses classified in the law as a specified service trades or businesses. Those include health, law, accounting, financial services, athletics, and other businesses. They also include businesses based on the reputation or skill of one or more of its employees or owners. Those businesses are considered unqualified under the law, and the deduction starts to phase out for income past the thresholds.
But businesses aren’t always as neatly defined as the new tax law apparently envisioned.
“What if one piece of the entity is not qualified at all, but the others are?” asked Wang. “You could have a large business or a mid-sized business, but half of it is qualified and half of it’s not.”
Wang used the example of a veterinarian’s office, which provides health services, which would not be qualified under Section 199A.
“But a lot of them get revenue from sales: pet food, pet toys, pet supplies. Will they be able to take a full deduction for the sales of those items and then be limited on the health services?”
On the matter of employee skills and reputation, Wang used the example of a Michelin three-star restaurant versus an upscale chain. Both are in the same business, but one depends much more on the skills and reputation of their chef, which could mean that both might not be able to use the deduction to the same extent.
“The chef at the three-star restaurant, that business relies on the skills and reputation, it’s not the name of the restaurant. However, at a Ruth’s Chris restaurant, it’s actually the brand name Ruth’s Chris. They can switch out their chef at any point. Is that now not considered skill and reputation?”
The guidance is coming
Kautter, in a May meeting of the American Bar Association Section of Taxation, said the IRS plans to release in July its guidance about the Section 199A deduction.
“I would recommend not waiting for them,” said Hall. “There is already lots of information out there. As we move through 2018, we are already under a new tax law, so we already are going to be paying lower taxes. So if we wait until September or we wait until August or we wait until January, we’ve lost the economic growth of the things we could have done with our business income for all of that period of time.”
Once the guidance becomes available, Wang recommends business owners speak with a CPA about it. “You really need someone that’s been paying attention to everything the Treasury’s been putting out and all the releases, because that’s the only way.”
Pass-through guidance requested
The American Institute of CPAs in February asked the Treasury Department and IRS for immediate guidance on the following topics concerning the Section 199A deduction for pass-through entities:
– Definition of Section 199A Qualified Business Income.
– Aggregation method for calculation of QBI of pass-through businesses.
– Deductible amount of QBI for a pass-through entity with business in net loss.
– Qualification of wages paid by an employee leasing company.
– Application of Section 199A to an owner of a fiscal year pass-through entity ending in
– Availability of deduction for Electing Small Business Trusts.
Acting IRS Commissioner David Kautter said guidance on Section 199A is coming in July.
What’s a ‘specified service trade or business?’
A business classified as a “specified service trade or business” under Section 199A faces limits on the pass-through deduction.
The law identifies these businesses as:
– Any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners; or
– Any business that involves the performance of services that consist of investing and investing management, trading, or dealing in securities, partnership interests, or commodities