Now that it’s tax season, you may be concerned how the Tax Cuts and Jobs Act, enacted in December 2017, will impact your small business. The reforms represent the most sweeping tax overhaul in 30 years and could have a positive impact on your business’s bottom line—but they may have left you feeling a little confused. Here are some of the most important changes.
Qualified Business Income Deduction
Under the new tax law, many owners of pass-through businesses, such as sole proprietorships, partnerships, and S corporations, may deduct up to 20% of their qualified business income. This new deduction—known as the qualified business income deduction or Section 199A deduction—can be claimed by eligible taxpayers on their 2018 federal income tax returns, lowering their taxable income. One notable exception is that married owners of service-based businesses like accounting firms or doctors’ offices, can only claim the deduction if they have an annual income below $315,000 ($157,500 for single business owners). This deduction replaces the domestic production activities deduction, which allowed business owners to write off 9% of income derived from qualified domestic manufacturing and production.
Lower Corporate Tax Rate
The centerpiece of the new tax law is the reduction of the corporate tax rate from a top rate of 35% to a flat rate of 21%, a substantial cut for many businesses structured as C corporations. However, because the reforms eliminated the 15% rate on the first $50,000 of taxable income, some small C corporations could end up with a bigger tax bill. For example, a C corporation with $50,000 of taxable income that would have owed $7500 under the prior law will owe $10,500 when it files its 2018 federal tax return.
100 Percent Expensing for Qualifying Business Assets
Businesses can now write off the entire cost of most depreciable business assets in the year the business places them in service, resulting in reduced current income tax liability. This break generally applies to depreciable assets with lives of 20 years or less--items such as, machinery, computers, and furniture. This part of the tax reform law is temporary, lasting until 2022 and then phasing out over several years.
Increased Depreciation Allowances for Vehicles
Businesses that purchased new or used vehicles after September 27, 2017 and placed them into service in 2018 can claim an increased maximum allowance of $10,000 for Year 1 or $18,000 if first-year bonus depreciation is claimed. For year two, the cap is $16,000 and for year three, $9600. For year 4 and all subsequent years until the vehicle is fully depreciated, the cap is $5760. For 2019 and beyond, the allowances will be indexed for inflation. In addition, for qualified new and used heavy SUVs, pickup trucks and vans purchased for the business, 100% of the cost can be written off, a significant improvement over the prior law.
Family Paid-Leave Credit
Under the new law, certain eligible employers who provide paid family and medical leave to their employees during the 2018 and 2019 tax years may qualify for a new business tax credit. To be eligible, employers must comply with a laundry-list of conditions, including having a written policy, providing at least two weeks of leave, and paying at least 50% of the wages normally paid to the employee. The credit is equal to 12.5% of the amount of wages paid during the employee’s time of leave. However, a larger credit is available for employers that pay over half the employee’s normal wages while they are on leave.
Some Deductions Eliminated or Reduced
Although many of the reforms result in tax savings for small businesses, some, like the elimination or reduction of certain deductions, could have a negative impact on their tax bills. Although there are many changes, here are some of the most impactful.
The owners of pass-through entities such as sole proprietorships, partnerships, and S corporations may be required to pay estimated federal taxes each quarter unless they had no tax liability the prior year or owe less than $1000 when they file their tax return. Because of the changes in the income tax rates, changes to deductions, credits and exemptions, the amount of estimated taxes that should be paid is a trickier question than in previous years.
What to Do Next
The new tax reform legislation is complex and sweeping. We’ll be happy to help you understand its impact on your business and provide guidance about how to maximize your tax savings. Please contact us to schedule a meeting.
Almost everyone wants to be the good guy. Engaging your business in the local community through volunteerism and charitable giving can have a positive impact both on your business and in your community. The more public-facing your business is and the larger your staff grows, the more opportunities your business will have to be the good guy as employees and community members seek support from your business. When yet another adorable uniform-clad kid comes in selling popcorn or cookies, or a service-dog organization brings in the big brown puppy dog eyes to seek a donation, you may need an escape hatch. Having a community-engagement policy in place will benefit your business by promoting community engagement, supporting your employees, and making it easier to say “no.”
Community Engagement Can be Good for Your Business
Every time a customer or prospect sees your business name or logo, you reinforce your marketing efforts and increase your brand awareness. Being active in the community can provide “stealth” marketing and goodwill opportunities, and even position you and your business as a community leader. Seek out a charity you want to align your business with. Look for a charity of a size that will meaningfully benefit from the amount or type of contribution the business will make. Here are some ideas to get you started:
Community Engagement Can be Good for Employee Morale
Community engagement can mean supporting individual employees’ community efforts or organizing company-wide volunteer events in your local community. In either case, promoting community engagement can strengthen your team, provide an opportunity to be part of something good, reinforce individual values, and shine the spotlight on employees for “off the clock” achievements. Ideas to support community engagement include:
A Community Engagement Policy is Good Business Practice (It’s Okay to Say “No”)
The more successful your business is, the more requests you’ll receive. No one wants to be the one to say “no.” If you have a policy in place, it can say “no” on behalf of the business. When a community member solicits a donation, it’s much easier to say, “I’m sorry but our policy is to focus our giving efforts on our chosen charity (or cause).” An employee, perhaps the 10th in your organization seeking a walk-a-thon sponsorship, can be referred to the community-engagement policy in the employee handbook.
Additionally, a policy can prevent animosity among employees or community members by setting expectations for company giving. Having a written community-engagement policy in place and following it consistently establishes the opportunities available, the limits, and, in turn, a sense of fairness.
Finally, a policy can assist with financial planning. If you set an annual limit on community giving and stick to it, this item becomes a known expense each year rather than an unpredictable budget item. Be sure to work closely with your tax professional to properly account for the business’s charitable giving activities.
Policies are Flexible
One final word—it’s a policy, not a hard and fast rule. Business owners should have the authority to adjust the policy to meet emerging circumstances. If an employee is stricken with cancer, a tornado rips through your community, or five employees have children in the same school play . . . then go ahead and contribute.
An operating agreement is a contract that controls your LLC’s operations as well as member interaction with each other and with the LLC. You may think that an operating agreement is not necessary for your single-member LLC - after all - why make an agreement with yourself?
Is the Operating Agreement a Legal Requirement?
Colorado doesn’t require an LLC to have an operating agreement. Although Colorado recognizes oral operating agreements, written agreements are clearer and easier to prove. Colorado does not require an LLC to file an operating agreement with the Secretary of State; instead, the operating agreement is kept with other business records. It’s always a good idea to create a formal, written operating agreement—even for a single-member LLC. Here’s why:
REASON 1 – Avoid State-Imposed Default Rules
Without an operating agreement in place, your LLC is bound by the default rules of your state. Most state laws governing LLCs allow the default rules to be overwritten in the LLC's operating agreement.
REASON 2 – Maintain Control
As the business gains momentum, you may want to hire a manager to take care of the day-to-day business operations so you can shift your attention to business-development opportunities. An operating agreement can define the manager role—designating the authority and compensation and what happens if the manager leaves or competes with the company.
REASON 3 – Keep Business and Personal Identities Separate
An operating agreement helps distinguish the business from the owner for liability purposes. A major benefit of an LLC is that it limits liability going both ways: the LLC protects a member from business liabilities and the business assets from a member’s personal liabilities. Without an operating agreement in place, the business may look like a sole proprietorship. If a court doesn’t see your LLC as an entity separate from you, you could lose the liability protection that an LLC offers.
REASON 4 – Clarify Succession
An operating agreement can specify what happens if you die or become unable to run the business. Without this specific provision, your family may have a hard time continuing the business or winding it down.
REASON 5 – Scalability
Successful businesses grow. And growth requires capital. An operating agreement can specify how future investors will be treated. If you structure these terms in the operating agreement, the LLC will be better positioned in the investment negotiations.
Let’s Continue this Conversation
An operating agreement serves an important role, even for a single-member LLC. The operating agreement puts you in the driver’s seat and enables the LLC to perform its main task—to limit liability.
If you have an operating agreement in place, we’d be happy to review the agreement as well as your business needs to ensure the operating agreement and LLC are in sync. Or, if your single-member LLC doesn’t have an operating agreement in place, we’ll work with you to craft an appropriate agreement.
Bailey & Peterson, P.C. was pleased to act as Colorado Counsel for the purchaser, EX Vail, LLC in this transaction