THE TAX CUTS AND JOBS ACT,
signed into law at the end of last year, is set to have a significant impact on both businesses and individual Minnesotans.
The changes are numerous and complex, and they’re no doubt going to affect businesses of all sizes — not to mention owners and employees.
JNBA Financial Advocates, the wealth management firm where I’ve served as a senior advisor for the past 17 years, recently brought together a panel of CPAs to talk about the new law. Here are six important general takeaways Minnesota businesses should consider:
Some significant shifts are underway.
The standard deduction has increased for 2018. It’s going to be $24,000 for a joint return, $18,000 for head of household and $12,000 for single filers. At the same time, the personal exemption is being suspended. “The thought is that this is being incorporated into the standard deduction,” says Patty Moskalik, a CPA at E.T. Kelly & Associates.
Deductions are also in flux.
The medical expense deduction has been lowered, and other tax deductions now have limits. “One of the major changes for individuals is the state and local tax deduction, particularly for Minnesota residents where we have a high state income tax,” Moskalik says.
The deduction for state and local sales tax, income tax and property tax is now being capped at 10 percent or $10,000, where there was no limit before.
In some cases, things are about to get simpler.
Businesses under $25 million in revenue will now be able to utilize the cash method of accounting. Instead of using the accrual method — recording sales when they’re made and payables when they’re accrued — they’re now able to record their taxes based on what they collect and spend during the year
. “That’s a nice change for businesses of this size in that they’re allowed to simplify the way that they do their accounting for taxes and control the timing of expenses and revenue,” says Kevin Besikof, a CPA with Lurie, LLP in Minneapolis.
In other cases, they’ll get more complicated.
For instance, meals and entertainment is another category that has been significantly changed. Historically, entertainment expenses have been 50 percent deductible. Going forward, they are not deductible.
And meals provided for the employer’s convenience used to be 100-percent deductible. Those are limited to 50 percent deductible going forward.
“There is some gray area in that,” Besikof says.
“I recommend at this point that people, when they’re coding their business expenses, have a separate chart of account, one for meals and one for entertainment.
He says it makes sense to really specify and document the “who, what, where, when and why” to identify the purpose of the meals and entertainment. “And then when the rules get finalized, determine what’s deductible and what’s not.”
Some pass-through businesses will see a major benefit.
One of the most significant and complex areas of the new law affects pass-through businesses — S Corporations, partnerships or LLCs, and Schedule C businesses. As a general rule, the law allows for a deduction of up to 20 percent of the qualified business income from those entities.
But, whether or not your business qualifies depends on a number of factors including whether your business is one of a number of specified services. A specified service business would not qualify for the 20 percent deduction whereas a qualified trade or business would.
A specified service business is identified as business in financial, medical or law, or any other business where its primary asset is the reputation of its owners or employees, Besikof says.
As you might expect, there’s a considerable amount of discussion around defining exactly what a specified service business is and who qualifies for the deduction. “There are a lot of requirements to meet but if you meet those, those people will get a big benefit,” says Moskalik.
Businesses can take advantage of fixed-asset deductions.
Another key change for business is related to how assets are purchased and expensed. “One of the goals of the tax changes was to encourage purchasing of fixed assets,” says Besikof. To do that, bonus depreciation, which had been a concept previously in the tax law, was brought back. It allows for 100 percent deduction of fixed asset purchases from 2017 through 2022 with a declining scale then allowed through 2026.
This is a good time to align your financial approaches.
In any case, but especially when a complex and sweeping new law like this takes effect, make sure your financial approaches — and your advisers — are on the same page.
One point I think is particularly critical: It’s a good idea to bring all of your advisers together, including attorneys and tax professionals, to talk through what a changing climate could mean for your business and, if you’re an owner, your personal taxes.
Your financial adviser can act as quarterback to ensure that everybody is contributing to your financial bottom line by handling their areas of expertise, nobody’s stepping on toes and that all of your professionals are pointed in the same direction.
Now is the time to focus on planning to look at both short- and long-term goals and adjust your strategy as necessary.
While there is still a lot of murkiness around the new law, one thing is clear: There are multiple elements to be aware of regarding the new tax law, and many of them extremely nuanced. So it’s a good idea to discuss the topic in greater detail with your accounting professional of choice before making any changes.
PLEASE SEE IMPORTANT DISCLOSURE INFORMATION at www.jnba.com/disclosure.
Patrick Moyneur is a certified financial planner and a vice president and senior advisor at JNBA Financial Advisors: 952.844.0995; email@example.com; www.JNBA.com.