SmallBizlady: This year ended in a frenzy as the President signed a new tax law. How does that affect taxpayers filing their 2017 tax returns?
Eva Rosenberg: The good news is, only three provisions of the Tax Cuts and Jobs Act (TCJA) affects your 2017 tax return.
- Medical Expenses – are only reduced by 7.5% of AGI (was 10% of AGI).
- Charitable contributions – must have receipts, even if the organization reports your contributions.
- 100% Bonus Depreciation is effective for assets put into service after September 27, 2017 – and this also allows you to use bonus depreciation on used assets.
SmallBizlady: There’s one other thing we need to know about 2017 – especially for small businesses – that’s the mileage.
Eva Rosenberg: Yes. Here it is for 2017
- 53.5 cents per mile for business miles driven
- 17 cents per mile driven for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations
- 25 cents per mile is the depreciation on the vehicle.
While we’re at it, here are the mileage rates for 2018, so you can work on this year’s expense reports and vehicle planning.
- 5 cents for every mile of business travel driven
- 18 cents per mile driven for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations.
- 25 cents per mile is the depreciation on the vehicle.
SmallBizlady: You said there was a good reason to hold off filing tax returns early this year. Why wait?
Eva Rosenberg: Two reasons. First, companies are still scrambling to get all their W-2s and 1099s filed and sent out on time. So expect them to be late – or wrong.
(Incidentally, did your members send out 1099-MISC forms to everyone who should be getting them?)
The second reason to wait is – there are several tax provisions that expired in 2016, that just got extended on February 9th.
If you have a little patience while the IRS updates the relevant forms, you can use all these tax breaks on your original tax return, instead of filing an amended return.
SmallBizlady: What are those tax extenders that might affect us? Let’s see if they are worth waiting for?
Eva Rosenberg: These tax provisions previously expired as of 12/31/16 or sooner, they have been extended, effective January 1, 2017
- Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness.
- Mortgage Insurance Premiums Treated as Qualified Residence Interest.
- Above-The-Line Deduction for Qualified Tuition and Related Expenses
- $500 Lifetime Credit for Nonbusiness Energy Property
- 30% Credit for Residential Energy Property
- Credit for New Qualified Fuel Cell Motor Vehicles
- Credit for 2-Wheeled Plug-In Electric Vehicles
SmallBizlady: Since not too much really affects the 2017 tax return, is there any reason we need to take actions now?
Eva Rosenberg: Yes. A lot of things have changed (for better or worse) for small businesses and employees with un-reimbursed business expenses. As a result, it might be important to create an entity (LLC, partnership, corporation or S corporation), or to change the nature of an entity.
Many of the decisions require some kind of filing by March 15th.
So, if you are affected, it would be a great idea to schedule an appointment with your tax professional by the end of February – if you can get an appointment.
SmallBizlady: For instance, what is the issue for employees with unreimbursed business expenses?
Eva Rosenberg: The Tax Cuts and Jobs Act eliminated all Miscellaneous Itemized deductions that are normally reduced by 2% of adjusted gross income. (Currently, Schedule A, lines 21-27).
This includes all the usual expenses that outside salespeople have, as well as people who use their own tools and supplies at work, and all employees who pay for these kinds of expenses, out of their own pockets: meals, entertainment, travel, supplies, education, computers, office in home, even union dues.
The good news is – these deductions are not eliminated for businesses or entities – that includes Schedule C, LLCs, partnerships, S corporation and C corporations, and trusts.
SmallBizlady: For employees that will lose these deductions, is there something they can do?
Eva Rosenberg: Yes, there are three options:
1) Re-negotiate their job with their employers, so the employer does reimburse them for their expenses. A good way to handle this is to use an “accountable plan” where they submit their mileage and receipts to the employer. Then the employer reimburses them. The employer gets all the deductions – and the employee doesn’t pay tax on any of those reimbursements.
2) Negotiate an arrangement where they can become freelancers, under contract to the employer. That means the employee goes into business for him/herself. This can make all the expenses deductible – but the employee could lose so very much in the process.
3) Get another job with an employer who will be cooperative with step (1).
SmallBizlady: You mentioned that the employee would lose a great deal if they take option 2 and become freelancers. What could the employee lose?
Eva Rosenberg: If someone forms their own LLC and works as a freelancer, what do they lose that they normally get as an employee?
- Sick days
- Vacation days
- Health Insurance
- Reimbursed expenses
- Bonuses
- Paid holidays
- Promotions
- Employer pays half of your Social Security and Medicare (7.5% of $115,000 – nearly $9000)
- State disability benefits
- State unemployment benefits
What do they gain?
- They have to pay for the entity’s bookkeeping
- They pay for all the costs of running a business
- They have to give them an invoice for each payment period or you don’t get paid.
- They pay self-employment taxes (twice as much as the withholding for Social Security and Medicare for employees)
Look at the value of all those things one loses vs what one can gain.
SmallBizlady: What’s going on with entertainment expenses? Was there a change?
Eva Rosenberg: Yes. Effective January 1, 2018 – everyone, including business owners loses all deductions for entertainment expenses. That means no concerts, no plays, no sporting events, etc. Not even if it’s part of a business meeting or discussion. Having Apple buy up a stadium and bring a big-name entertainer to convention – not deductible.
We still get to deduct our client meals, though.
SmallBizlady: Let’s get back to businesses – what’s the good news for C. corporations?
Eva Rosenberg: C Corporations now have a flat tax rate of 21%. For those companies whose profits were always well above $50,000, this changes their old tax rate of 25% – 39% to only 21%.
But C corporations whose profits were always under $50,000 – they were paying only
15%. So this 21% rate will cost them an extra $3,000.
Also, there is no longer a corporate alternative minimum tax. That was abolished permanently.
SmallBizlady: Is there news for pass-through entities – like partnerships and S corporations?
Eva Rosenberg: Absolutely. The Qualified Business Income Deduction (QBI). It’s a 20% deduction for pass-through entities, based on the business’ profits, wages, and capital asset purchases.
It looks really interesting, but it’s excessively and needlessly complicated.
The deduction applies to Schedule C businesses, as well as partnerships and S corporations (or LLCs filing as partnerships or S corporations). This deduction is available to joint filers with income up to $315,000, or other taxpayers with half that income – $157,500. The benefit phases out entirely for joint filers at $415,000 and for everyone else at $207,500.
These limitations also apply to “service businesses.”
SmallBizlady: What is a service business under this new law?
Eva Rosenberg: The short answer is – services in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of the business is the reputation or skill of one or more of its employees or owners. It gets more complicated – but there are loopholes we are exploring.
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