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Navigating the revamped tax code in 2019 really starts with your 2018 filing.
By David Gould
By passing a full-scale revision of federal tax law at the end of 2017, Congress set up a double challenge for business owners here in the first quarter of 2019. The customary task of planning current-year business activity so as to maximize tax savings must be taken on, and yet the dollars-and-cents effect of the law just passed — the Tax Cut and Jobs Act — isn’t truly known, because taxes for 2018 aren’t yet figured and filed.
“You can do a lot of reading on various aspects of the new law,” says business tax expert Mike Jamison, “but likely it will only be when the rubber hits the road on your 2018 return that you’ll grasp its impact on your finances.”
Jamison is president of OnTarget CPA, a prominent accounting group in Indianapolis. He notes that, while the tax code has long played a game of give something-take something away, these new regulations are especially prone to do that. The result is greater difficulty in generalizing about one course owner’s tax scenario versus that of another owner whose business seems quite comparable.
For example, there are now much tighter restrictions on what a taxpayer can deduct (on the federal return) for real estate taxes and state and local taxes. Filers who have relied heavily on those deductions in the past to reduce what they owe Uncle Sam could be in for an unpleasant surprise under the new law.
“In a state like Indiana, we wouldn’t be impacted as much by this limitation because state and local taxes in this part of the country don’t compare to what people in California or the Northeast pay,” says Jamison. “So, with that deduction now capped at $10,000, it will really hurt someone who was paying $50,000 in state and local tax and was able to deduct that against their federal tax bill.”
One piece of the new law that will prove merciful is its revamping of the Alternative Minimum Tax. If your best-laid tax plans have been spoiled by the AMT in the past, very likely you’re free of that misery now, in Jamison’s view.
Reviewing the basics of the TCJA starts with saying that posted federal tax rates have come down. The old 15 percent bracket is now the 12 percent bracket. The next bracket above that formerly carried a 25 percent rate, it’s now at 22 percent. The one above that, which formerly skimmed off 28 percent of your taxable income, now takes 24 percent. Higher up the rate chart there is minimal change from the old percentages.
While the chart of rates and brackets for the federal tax you pay looks friendlier, it has to be put in the blender with new changes to the rules concerning the personal exemption, the standard deduction and the child tax credit. The personal exemption, which last year was $4,050, is no longer. To make up for its elimination, lawmakers have roughly doubled the standard deduction, from $6,350 for single filers to $12,000 and from $12,700 for married couples to $24,000. Per-child credits are increased, so the sum total of rates and deductions will be positive for many.
This brings us to the lip-smacking 20 percent tax deduction on owners of basically any business that isn’t a corporation — this would include sole proprietorships, S-corps, LLCs, partnerships and anything else most course owners would be using as their business structure. It’s complex, so a summary article like this can merely lay out advice on how to approach the topic with a professional tax preparer, so that the two of you can discuss it sensibly and productively.
KEY POINTS TO HELP THAT PROCESS:
• It’s referred to as the “Section 199A deduction” or the “deduction for qualified business income.” Politically, this was a way for Congress to hand corporations their juicy new 21 percent tax rate — slashed from 35 percent — and not be hit with complaints from small and medium-sized businesses saying “what about us?”
• The first data point the IRS provides on Section 199A is about income and eligibility. The guidance notes the relief “is generally available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers.” So, the ceiling on this benefit is at least reasonably generous.
• The concept of the relief is this: Owners of pass-through businesses usually do pretty well for themselves, but they don’t have corporate lawyers and accountants helping them squeeze down their tax bills. Much of their business revenue passes through and finds its way onto the owner’s personal Form 1040 tax return, where it’s taxed at a high rate. So, on its way “passing through” from the business P&L sheet to your personal 1040 income, 20 percent of this money, known as Qualified Business Income (QBI), would in theory disappear for federal tax purposes. According to Jamison, the full 20 percent relief won’t occur in many cases, but that’s because other, more valuable deductions would supersede the pass-through deduction.
“The QBI deduction isn’t allowed in calculating the owner’s adjusted gross income, but it reduces taxable income,” says Jamison. “In effect, it’s treated the same as an allowable itemized deduction.”
One wild-card factor Jamison brings up involves accelerated depreciation on business capital assets, such as buildings and equipment. He urges course owners to look into that opportunity closely. “What many owners may not realize is how different the depreciation rules treat equipment and assets — cabinetry, for example — inside a building, versus how they treat the clubhouse building itself,” Jamison says.
To repeat, the rules and calculations described here have already had their effect on one year’s earnings — by no later than April 15 Americans will know where that left them. Meanwhile, 2019 legitimately stands as the first year in which most business owners can make decisions on their operations and their personal finances in light of this once-in-a-generation overhaul of the tax code.
David Gould is a Massachusetts-based freelance writer and frequent contributor to Golf Business.