by Craig White of TQ Financial Services
With the recent changes to the tax laws, many entrepreneurs have found themselves wondering what will happen when they file their taxes? Was the change beneficial? Are they structured correctly in order to receive the best possible deductions? These are all legitimate questions and we will try to answer as many of them as we can today.
Most small businesses owners and entrepreneurs will be happy to find out that there will be a 20% deduction for all qualified business income, as long as you are a pass-through entity. Sole proprietors, Limited Liability Corporations (LLC), S Corporations and partnerships are all considered pass-through entities. The only structure that is NOT under this umbrella will be the C Corporation.
To qualify for the full 20% deduction, your taxable income most be below $157,000 as a single person and $315,000 if married and filing jointly. Those of you who are involved in partnerships should pay close attention. One partner can qualify for this huge break while the other may not. A spouse’s income may push one of you out of the income threshold, which would mean that you would no longer qualify under the new law.
Do I have to form a company? No, you don’t BUT, we encourage all of our clients who receive 1099 income to consider opening a business. The primary reason for this is to protect yourself from the personal liability for the debts incurred by the business. By forming the business, only the LLC, for example, would be liable for the debt and liabilities incurred. Your personal finances will be protected, unless you signed a personal guarantee. This does not mean that you can never be found liable for anything personally. You will remain personally liable for any wrongdoing you commit during the course of business transactions. So, forming a business will NOT protect you against your own negligence, malpractice, or personal wrongdoing related to the business.
What business structure should I choose? This will depend. We usually recommend that most people start off as an LLC and if income exceeds $60,000, convert to the S Corp. Keep in mind that you won’t be able to go from the S Corp to the LLC once the conversation is made. Both business structures have pros and cons. We are only going to review the ones we find to be the most important. The LLC is much less restrictive compared to the S Corp. They are usually easier to set up and to maintain. A single member LLC will only need to file one tax return, since they only report the activity on their personal tax return. The major con is that a single member LLC will have to pay self-employment tax. The S Corp shines when it comes to its tax benefits. Since most S Corps pay their employees a “reasonable” salary, things like federal taxes and FICA are already deducted. The remaining profits can then be distributed to the owners as dividends, which are taxed at a lower rate than ordinary income. The cons would be that one must follow strict guidelines per tax code and the list is long. It usually costs more to set up and maintain and there are shareholder requirements that need to be followed.
Partnerships and C Corporations are another story and we won’t be touching on those today.
It’s important to note some of the deductions that have either been removed or reduced. Please keep in mind that there are other changes but these affect the majority of the businesses out there:
- Employee transit and parking benefits can no longer be deducted.
- Client entertainment expenses are no longer deductible. So no more basketball games,golf outings, concerts, etc.
- Client meals are still a 50% deductible expense.
- Employers who provide snacks and meals for employees, used to be able to deduct100% of the expense. That has been reduced to 50%.
- Company parties and or get together, are still 100% deductible.
The bottom line is that the changes have been a benefit to most entrepreneurs no matter how they are structured. You should speak to your tax professional to determine what format is best for you so that you can not only enjoy the tax breaks but keep yourself safe from personal attacks.
We hope this blog helps you better understand how this upcoming tax season and its changes will affect your filling. We want you to earn, learn and put yourself in the best financial position possible.
If you have questions, concerns or are looking for a Tax professional give TQ Financials a call. Craig has first hand experience dealing with Face Painters, Entertainers and creative entrepreneurs. He can help you make sense of deductions, understand how to file, and help you save money.
Craig and TQ Services will be at FABAIC www.fabaic.com with an information booth at our Biz 2 Biz day. Stop by say hello and up your financial IQ.
TQ Financial Services
4807 South State Rd 7
Davie, FL 33314