Avoiding Surprises: How Business Decisions Impact Personal Taxes for Owners
Business owners undoubtedly have a lot on their plates. And if the business has multiple owners, things can become even more complex. If you are operating as a partnership or S corporation, the Tax Cuts and Jobs Act of 2018 (TCJA) brought in some new factors for business owners to consider, making it very important for all owners to be on the same page to be in the best position possible when it comes time to pay taxes next year.
With the 2018 tax season just wrapping up, the last thing you may want to think about right now is tax planning. But, the best time to start planning is now in order to make sure you are taking advantage of changes to the tax law.
Owners should use the same tax advisor. Since the business income is taxed at the individual owners’ tax rate, more than likely the owners are in different brackets. Having the same tax advisor allows for that big picture view for all involved to be in the best situation possible. The right hand needs to know what the left hand is doing, so to speak. When owners work with different tax advisors, one owner may inadvertently cause a nasty surprise for the other!
Here are some reasons why multiple owners should consider working with the same tax advisor to get your planning off on the right foot and to avoid surprises when next tax season rolls around:
- The new TCJA law includes a qualified business income (QBI) deduction, which means taxpayers with pass-through businesses like a partnership or S corporation, are able to deduct up to 20% of their income from these businesses on their taxes.
- Also under the new law, businesses can expense more with bonus depreciation and/or section 179 property. There are certain limitations and exclusions to consider.
- If you are a shareholder in a S corporation, you don’t pay self-employment taxes, which are Social Security and Medicare, on the distribution from the business but if you work as an employee, you must be paid a “reasonable” salary. The IRS has guidelines on the definition of what a reasonable salary is and it can get pretty complicated.
- Each owner can have a different basis or amount at risk in the business. This can change the amount of loss or other deductions that would be allowed on their individual returns. To avoid suspended losses or missed deductions it is important for the proper decisions be made at the entity level before passing through to the owner’s tax return.
- Fringe benefits paid on behalf of a partner in a partnership or an S corporation shareholder may not be tax deductible. The family attribution rules treat certain family members who work for the business as if they were owners and the benefits they take advantage of will receive the same treatment as the owner. For example, health insurance, which must be to individual compensation in order to be deducted by an S corporation.
Not sure where to start? To get the full benefit of lessening the impact taxes will have on your business in 2019, the time to start is now. See what we can do for you. Start here.
ABOUT THE AUTHOR
Rosalie Newkirk, CPA/PFS, CFP®
Rosalie has more than 25 years of experience helping clients with accounting, assurance and financial planning needs, specializing in tax engagements. She is particularly drawn to working with entrepreneurs and owner-managed businesses.
Rosalie holds a bachelor’s degree in accounting from the University of Missouri – Kansas City. She is very active in the community, where she is a member of the Chamber of Commerce, Education Foundation, Velocity and Sunrise Rotary organizations in Lee’s Summit. She also is involved with Pro Deo Youth Center and Truman Heartland Community Foundation. In her free time, Rosalie enjoys walking, reading and family activities.