Being an entrepreneur often seems like the dream life when you get to focus on the fun parts like marketing, networking, and even sales. But all of the fun parts may be a waste if you are not focusing on the bottom line. One area that you can pay attention to that will really impact your cash flow and your bank account is taxes. Right now, if you haven’t already, you need to focus on all the changes that are new for 2018 returns. Here are some with the biggest financial impact:
Lower tax rates
Rates are lower for businesses and individuals. There has been a lot of buzz about the huge reduction from a maximum of 35% to 21% for bigger corporations know as C Corps, but the lower personal rates that most entrepreneurs are subject to will reap some rewards as well– the average household will save $3000 on income of $100,000 according to estimates from IRS.
Entrepreneurs operating “pass-through entities” like S Corps and LLC’s are big winners in the new tax law as well. For the first time ever- if you own a sole proprietorship, partnership, S Corporations or Limited Liability Company, you can deduct 20% of net business income on your personal return. In effect, you are only being taxed on 80% of your profit. There are some businesses not eligible and some income phaseouts - but generally, most entrepreneurs will qualify - this is an area you should be seeking professional guidance on because it can save you THOUSANDS!
Bonus Deductions to Add Business Property
Some investments in your business can get a bonus to write off of 100%, this is up from the past limit of 50%. If you need to invest in new technology and equipment – now may be the time while this provision is available for the next 5 years. Another new perk- used equipment can also take advantage of this new bonus depreciation. In the past, only new equipment has qualified which limited the usefulness of the ‘bonus”. These new rules make investing in your business now much more affordable.
Cars became less taxing
The amount you can deduct for your business car jumped from a maximum first-year limit of $3,160 in 2017 to $10,000 in 2018. This makes driving a nicer car or “luxury car” as the tax law calls them more affordable. In reality, the limits in the past did not even cover more modest vehicles.
The Price tag for these tax wins
Like always, someone has to pay for reductions in taxes with more tax or fewer deductions. This time the deductibility of entertainment expenses has been taken away. Before 2018, you could generally take a tax write-off for half of your business-related entertainment costs. The tax law eliminated this break, so no more writing off show tickets, golf course fees, sporting events etc., even if taking clients.
Holiday parties are still fully deductible and there are no changes to employee meals while on business travel - these are still 50% deductible for you and your employees.
Think about taxes all year long. Small business owners should not treat income taxes as a once-a-year event. Rather, tax planning should be a year-round activity. Waiting until the last minute makes tax preparation more complicated, and it limits your money-saving options.
Be aware of law changes. Even with the help of a skilled professional, entrepreneurs must keep up with news related to laws. This will ensure your tax professional is doing the best possible job, and it keeps you informed as a business owner. Read the business papers and keep up with Congress' work on tax laws.
Don't make assumptions. Tax planning, to some extent, is a gamble. Never make business decisions assuming that particular tax breaks will pass, or that certain policies will be enacted.
Taxes can end up as one of your biggest expenses and a big drain on cash flow as you build and scale your business. While it is possible to do your taxes on your own, you should seriously consider working with a CPA. A tax professional can ensure your business is taking advantage of all the deductions available and, more importantly, can ensure you're paying everything you owe, but not more than you need too.
For more tips on the personal impact of the tax law check out these tips: http://bit.ly/10Things2018TaxLaw
Deborah Daniel is a 25-year veteran CPA firm owner. Her experience focuses on the money side of the business in all areas of finance and profit strategies.