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Although official tax season may seem months away, small business owners should look at what they need to do before the end of the year in order to take full advantage of tax benefits for 2019 and to position themselves better going into 2020.
In this week's CT Expert Insights, attorney and small business expert Barbara Weltman discusses
Barbara Weltman has been called the "guru of small business taxes" by The Wall Street Journal. She is a tax and business attorney, small business consultant, speaker and author. Among her top-selling books are J.K. Lasser's 1001 Deductions & Tax Breaks and The Complete Idiot’s Guide To Starting A Home-Based Business.
Greg Corombos: Our guest this week on Expert Insights is Barbara Weltman. She's an author and speaker, a small business expert. and a longtime tax and business attorney. We want to get her insights and some tips about how to approach our 2019 business taxes and what changes are also coming down the road in 2020. And Barbara, thanks so much for being with us.Barbara Weltman: It’s a pleasure.
GC: Well, we're well into the fourth quarter of 2019 now. So what should business owners already have pretty much ready to go for the upcoming tax season? And what should they be working on over these last several weeks of the year?
BW: Well, we're in the period for year-end tax planning. And I think there's a lot of things that can still be done to favorably impact your 2019 tax bill, position yourself for 2020 and just kind of take care of business. And one of the things I think that business owners may be thinking about right now, are year-end bonuses. And if you're kind of projecting them and figuring out what you're going to pay, especially in this type of job market where you want to retain employees, figure it's not only the cost of the bonus itself but also the payroll taxes that go on it.
It's also the impact that the year-end bonuses will have on what you have to contribute to an employee's retirement plan if the company makes such contributions. And favorably it could impact the qualified business income deduction that owners have pass-through entities can take because it increases W-2 wages. And so that's part of the factor and so that could be a favorable thing to happen. With that said, businesses should be thinking about what to do in terms of their equipment and machinery because there are lots of write-off opportunities that can be taken now to expense the cost of new or pre-owned items that you may need for your business. So look over what you have, and certainly replace what you have, or fix what you have and be able to work more efficiently.
I think you also want to look at your inventory now because if you have slow-moving items, you're going to want to put it up for sale before the end of the year so you can handle it in a favorable way for tax purposes.
And also, obviously, try to generate some revenue for your business. That's something to think about now.
In terms of what's going on, keep in mind that two key benefits are going to expire at the end of 2019. So, kind of use it or lose it type of thing here. We have the work opportunity credits of your hiring from a targeted group, such as ex-felons or certain veterans. You may be entitled to a tax credit for their hiring if you're qualified and you follow certain steps. So think about that, because that'll cut your costs there.
Another is a credit for paid family and medical leave if you're not required to offer it by your state or locality. This is another tax break that's again set to expire at the end of the year. So obviously, you want to think about what to do between now and the end of the year to help you with 2019 taxes.
But as you said, you have to be looking ahead, you have to be thinking about what you're going to do for the coming year. Certainly, this is the time of the year to be projecting your employee benefits packages for the coming year, including what you're going to be doing to that health insurance coverage, retirement plans, and other kinds of options that are out there.
Again, we're still in a tight job market. Well, while I've seen recent numbers that hiring has slowed up. I think as businesses continue to expand, they're going to need more help and certainly employee benefits packages are a key way to attract and retain great employees. So that's one thing to do.
I think you're going to be thinking about your pricing in the coming year, and what that's going to do only for your revenues for the coming year, but it's going to impact your taxes down the road. So I think I've talked about a lot of things.
GC: There's a lot of good content there. And there are a couple of things I'd like to follow up on, including what you said just a moment ago about investing in machinery and other infrastructure in your business. I know during the debates over what is now the new tax law, there was a lot of discussion about that. What actually changed in the new law and then how much of a difference does it make compared to what the law was before?
BW: Okay, so we have the section 179 deduction, which doubled under the new law. It used to be 500,000 indexed for inflation and then went to a million indexed for inflation. So for 2019 for example, you can write off a million to 20,000 in new equipment and machinery and other property that qualifies for the deduction. That's a big deal. Plus, there's a 100% bonus depreciation for this year for next year. And that can be used in conjunction with the first-year expensing, in fact. So that's, that's another write-off opportunity. And those are alternatives to traditional depreciation, which requires you to spread the recovery of your investment of over a number of years.
GC: And, Barbara, I know when we talked a couple of years ago, just after the tax bill was passed, you pretty much likened it to a mixed bag. It kind of depended on what type of business you had, and where you fell in terms of what tax bracket you were in and so forth. Now that we're a couple of years in, is it pretty much the same way, depending on what type of business you have and the size of it. Or is there a general way good, bad or otherwise, that things are trending here, as you see the impact of all this?
BW: Well, one of the things that I do see, when the new law was enacted and the corporate tax rate for C corporations was cut to 21%, there was a big cry that everybody was going to change their business format from being, let's say, a partnership or a limited liability company, or an S corp and immediately become a C corp to get the 21% tax rate. Well, that hasn't happened on math. I mean, there have been some business conversions, if you will, but not the dramatic change that had been predicted, I think, because it didn't matter for a lot of businesses and the complications of the C corporation versus other...the pass-throughs, that was, that wasn't a big game-changer.
On the flip side, the new qualified business income deduction for owners of pass-through entities hasn't been as big. It's really the biggest deal of the new law. It's a brand new kind of write off that you're entitled to take just because. So if you qualify, you get it, you don't have to expend any additional money to take it. As for advertising, you have to pay for advertising if you want to take the deduction. But for the QBI deduction, you get it if you qualify.
But with that said, after final regulations came out, there are so many adjustments to what goes into the qualified business income computation that it hasn't produced as great a benefit for small business owners as had been hoped, and especially for very successful small business owners. They've been kind of left out in the cold.
Another downside, I think, to the new law, is the rules for businesses, that haven't been successful. You know, businesses don't make money every year, and businesses do experience loss from time to time, whether you’re a small business or a Fortune 500 company.
And unfortunately, under the new law, there's no longer any net operating loss carryback that we used to look at favorably because at least it could generate some cash inflow for your business. Now, other than farming businesses, there's no carry back. What's more, the carry forward is now limited to 80% of taxable income were it used to be a full offset. So if you're in a loss situation, you're really not doing as well as you did prior to the new law.
GC: Just a minute or so left in our conversation, Barbara. Our listeners should know, if they don't already, that you've literally written many books. Not just the book, but many books on taxes, and how to approach them from the perspective of a small business owner from a self-employed person. And I'm guessing it’s folks on the smaller end because they might not have the resources, certainly when they first start, to hire tax people. They figured that they probably ought to do it themselves because they can't necessarily afford the professionals. And they might miss something along the way. So what's your advice to those folks operating relatively small businesses or literally self-employed as to make sure that they take advantage of everything that's available to them?
BW: I think it's essential for business owners of any size small, just starting out or whatever to know what the tax rules are so that you can make tax-savvy business decisions. In other words, you have to understand what the impact is of hiring an independent employee versus engaging an independent contractor. Or buying versus renting. So the resource that I want to suggest obviously is J.K. Lasser’s Small Business Taxes 2020 which is going to be out very soon and is for 2019 tax returns, but it's for year-end tax planning. And it really is kind of a holistic approach to running any business because it covers a lot of areas beyond just taxes, all of which circle back to impact taxes such as collecting on invoices and things like that. So how to set up your business and more. So I think it's a great resource and you'll save more money in taxes than the cost of the book.
GC: Go ahead and give the title one more time.
BW: J.K. Lasser’s Small Business Taxes 2020.
GC: Fantastic. Barbara, thank you very much for your time today. We greatly appreciate it.
BW: A pleasure.
GC: Barbara Weltman is an author and speaker, a small business expert, and a longtime tax and business attorney. I'm Greg Corombos reporting for Expert Insights.
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