In life, it’s said that two things are certain — death and taxes. But in business, there’s usually only one certainty: taxes. But this year, there were two things that were certain: taxes and the tax surprises that came when business leaders filed their 2018 returns.
“The biggest misconception about tax reform is that it reduced tax,” says Christina C. Roderick, CPA, principal at REDW. “Yes, rates were reduced, but many itemized deductions were lost along with new provisions limiting the ability to deduct losses. Our role as advisors is to help clients understand the impact to their business or individual tax return and provide suggestions on how to maximize the new tax laws to best meet their goals.”
Before you rush out and overhaul your accounting practices, know that nothing lasts forever.
“Although most C corporation tax law changes were made permanent under tax reform, the majority of the new tax law changes expire at the end of 2025,” says Christopher T. Coots, CPA, partner at Wallace, Plese + Dreher. “When considering a potential change in entity structure, evaluate the financial and operational aspects in addition to the tax impacts.”
Tax obligations go hand-in-hand with running a business. From the federal government on down to city hall, you need to be aware of which taxes your business needs to pay, how much in taxes you owe, and when you need to file. Make a mistake and your tax bill grows. At the same time, if you plan ahead, take the right available deductions, and prepare your tax returns properly, you can avoid tax surprises and save on the amount of taxes your business must pay.
“One of the biggest mistakes business owners make is not planning for all aspects of their tax lifecycle,” says Jeremy Smith, CPA, partner at Henry+Horne. “Too many owners are focused on short-term savings, whereas so many decisions focusing solely on the current year can have adverse effects on future years. Owners should always have a plan in place for their exit. The plan may not be finalized, but they should move forward with the potential exit in mind and realize how each current tax decision impacts the future exit event.”
But that’s not the only mistake business leaders make when it comes to their taxes.
“The most common areas that are not properly handled are state and local tax issues,” says David Humphreys, CPA, tax senior manager for BeachFleischman. “Small, medium, and sometimes even large businesses have a difficult time keeping up with all of the different state and local taxes. States and localities often impose sales taxes, use taxes, property taxes (including personal property taxes), and of course income taxes.”
But even income taxes aren’t always as simple as they seem though, because some states have a franchise tax, or a gross receipts tax, or a gross margin tax.
“The variation and complexity of state filings can be overwhelming to businesses,” Humphreys says. “Because of this, we commonly see a lack of compliance, or sometimes even a lack of awareness.”
Another mistake experts are seeing is not seeking out assistance in regards to sales tax compliance.
“Many companies are making sales tax nexus and product/service taxability determinations internally without consulting a qualified professional,” says Letizia Brentano, CPA, partner at Moss Adams. “In light of Wayfair and the changing sales tax landscape, it is key that businesses appropriately assess their historical exposure and current/future collection responsibilities.”
Brentano says this is a hot topic in any due diligence process and is resulting in negative purchase price adjustments to sellers.
“Since uncollected sales tax becomes the liability of the business,” she says, “it’s best not to cut corners in this area and seek out the assistance of a qualified sales tax professional to avoid any surprises down the road.”
In addition to other mistakes, Roderick says she often sees businesses wait until after the year is closed and then wanting to plan for different results. That’s never going to work, she says.
“At REDW, we work with our clients proactively throughout the year so business owners are making the right moves to minimize taxes before the year closes,” Roderick says.
But that’s not the only timing issue to avoid when it comes to taxes.
“The biggest mistake is not paying your taxes on time,” says Mike Finnegan, managing director at CBIZ & MHM. “Once you fall behind it is very difficult to catch up. If you know your taxes will be due at a future date, it is critical to set the money aside so you’re not scrambling to find the money come due date.”
Things to know
In addition to the tax reform surprises they learned about when they filed their 2018 taxes, there are still things business leaders might be interested in knowing.
“The two most impactful changes are the reduction in C Corporation rates to 21 percent and the 199A (Qualified Business Income) deduction,” Roderick says. “The 199A deduction has been a challenge to implement as guidance was late, but, wow, did we see great results. There are many opportunities within 199A, so analysis is needed and we recommend businesses spend time understanding this provision.”
Experts say a change that has been detrimental to many business owners is the change in the treatment of what used to be Qualified Improvement Property (commonly referred to as Leasehold Improvements).
“This property used to be depreciable over 15 years and was eligible for bonus depreciation,” Humphreys says. “However, under current law, this type of property is now 39-year property and not eligible for bonus depreciation. This means that opening a new store location, or doing major renovations on an existing location will likely not generate nearly as much deduction as it did in the past.”
Humphreys says there are several things that were deductible that are now non-deductible.
“One of the big ones for businesses is entertainment expenses,” he says. “No entertainment expenses are deductible, even if it is spent for the purpose of entertaining clients or potential clients. This has caused many businesses to look a little more closely at how they categorize their expenses. Historically, companies would often group meals and entertainment expenses into one category. Now they really need to have their own separate account.”
Also, for businesses that are impacted by GAAP (Generally Accepted Accounting Principles) reporting, Smith says there are significant changes to the revenue recognition standards.
“These changes may have an additional impact to how you report items for tax purposes,” he says.
Any change Smith sees as having a major impact is that a business defined as a small business (average gross receipts under $25 million) now has the ability to change their accounting method for certain items that were not available to them when the previous gross receipts test was only $5 million.
“Automatic change provisions have been put in place for things such as ability to use the cash method of accounting, ability to elect out of the UNICAP provisions and alternatives to inventory accounting,” he says. “This can greatly reduce the burden of some of these newly defined small businesses.”
And that’s not the only boost for businesses.
“Besides the 20 percent Qualified Business Income Deduction, a big tax benefit is the ability to write off 100 percent of your capital equipment purchases through 2022,” Finnegan says.
Planning ahead to avoid tax surprises
So what can business leaders start thinking about now that will help them eliminate some of the stress and tax surprises that come when they file their returns next year? Here’s what experts have to say:
Coots: “Tax reform created opportunities for companies with gross receipts less than $25 million to change their accounting method for tax purposes, i.e. accrual to cash. Consider implementing tax strategies before year-end to defer income and accelerate deductions. Also, accelerate expensing for the purchase of qualified new or used property.”
Finnegan: “Many of the available deductions must be supported by adequate records (contributions, mileage, and business versus personal use) so record-keeping is critical. Keeping organized tax records throughout the year will make tax time much less stressful when you feel you are not missing out on any available deductions (especially if you owe money) … Budgeting cash flow needs throughout the year and into the future will assist in developing a flexible plan to make capital equipment purchases so you can manage your taxable income. This capital improvement plan allows for the purchasing of needed equipment at the most tax-efficient time.”
Humphreys: “The new tax law has a provision called the Qualified Business Income Deduction. One of the limiting factors of how much this deduction will benefit you is the amount of wages your business pays. If your business is a pass-thru or a sole proprietorship then you need to consider the amount of wages you are paying, including wages to yourself when applicable, in order to achieve the maximum deduction. We call this exercise QBI optimization. Paying yourself additional wages out of an S Corporation, for example, can sometimes result in significant tax savings.”
Roderick: “We encourage business owners to look at results as not what they are but what could they be. Tax accounting methods, elections, credit and incentives are areas that should be considered during the year so they can reduce the stresses of tax return filing. The more informed a business owner can be the better.”
Smith: “Businesses can take advantage of the many new incentives within the new tax law such as 100 percent bonus depreciation, increased Section 179 expensing limits, newly defined small business accounting method changes and much more. These are all examples of items that can assist with the current year tax burden. Business owners should also realize that some of these incentives are simply time value savings and any deduction that can be accelerated into the current year simply means that they are front-loading that deduction. But, they can also look to other valuable moves with those tax savings such as incentivizing employees via establishing retirement plans, enhancing insurance coverages, implementing incentive plans, etc. These types of changes can provide a much more valuable benefit to their business by providing longevity of their employee base.”
Whatever business leaders decide, the one sure-fire way to alleviate tax stress and tax surprises is proper planning.
“Many of the best tax planning strategies require planning and structuring ahead of time,” Humphreys says. “I would recommend consulting with your tax advisor any time you are considering buying out another company, opening up a new store, entering a new state, starting up a new entity, or any other significant change. The key here is to consult with them before actually executing anything instead of coming to us afterward. Most of the positive things we can do to reduce tax or benefit business owners can’t be done once a transaction has already been finalized. So get your advisors involved on the front end of changes and transactions, not just on the back end.”