Preparing for Tax Time
Two Things You Need to Know about the New Tax Law Changes
Yes, it’s that time of year. Funny how vacations seem to take forever to arrive, but tax season is suddenly here again.
If you’re like most people, you don’t listen to the news with baited breath waiting for the latest information on recent tax changes. As a business owner, taxes are always in the back of our minds. In a retail situation, it’s sales tax; but annually we all also have to think about our business and personal taxes.
Now, before we begin, there is one caveat that should be clear for every business owner:
Never make any financial decisions based on tax rules or regulations without first consulting your accountant or a tax professional.
While many of the changes that take place in our tax laws over the course of a year have no impact or effect on us or our businesses, this year there have been some changes that may affect business owners on Maine’s islands and coastal communities.
The Tax Cuts and Jobs Act (TCJA) was passed by Congress in 2017 and enacted at the Federal level in the 2018 calendar year. Although there are a number of tax law changes in the TCJA, there are two, in particular, that could be of great benefit to small business owners on the Maine islands and along the coast.
If your business has large equipment that it needs to purchase, and it is something that will last less than 20 years, you may have some tax savings. If you purchased a boat, truck, tractor, or anything that falls within the parameters of the new tax law, you can depreciate the entire 100% of the cost in this tax year. In 2017, the Bonus Depreciation rate was just 50%. If you had a great year with more income than anticipated, this may be one way to offset your tax bill. Again, check in with your tax professional.
Business Income Deduction
A second change in the rules that may benefit your business is a new business income deduction. As you know, the net income on your business after expenses are deducted from income is the business income. If your business is structured as a Sole Proprietorship, Limited Liability Corporation (LLC), or S-Corporation, it is considered a pass-through entity. That means that the business’s net income that passes from the business to you as the owner is recorded as income on your tax return.
In the past, business owners were taxed on 100% of net profits as income. This year, the TCJA has added a provision that reduces that rate to 80% to encourage the expansion of small business. For example, if net profit from your business passes directly to your tax return as income is $10,000, this year you will only pay taxes on $8,000, a reduction of the total by 20%.
I hope these two changes in the tax law might help your business. Again, it is important to never make any financial decisions based on tax rules or regulations without first consulting your accountant or a tax professional.
As always, start thinking in the current year about your tax liabilities in next year’s tax season. Planning now can help reduce the tax bite later. In the meantime, check out some of the resources below to help you navigate your way through tax season this year.
Tax Resources for Small Business Owners
Articles referenced in this newsletter:
- 3 Ways the New Tax Bill Impacts Small Businesses; BizFilings
- How small business owners can take advantage of the new tax law before it’s too late; MarketWatch; August 13, 2018
- 2018 Tax Reform Details: 5 Big Wins for Small Business Owners; Wealth Factory
- Will small businesses benefit from the new tax law?; PBS Making Sen$e; February 28, 2018
Additional tax assistance:
- Maine Small Business Development Centers
- IRS: Small Business and Self-Employed Tax Center
- IRS: Business Taxes
- Maine Revenue Services
The Island and Coastal Business Launchpad
Maine’s islands and coastal communities have a high percentage of households that operate their own small businesses. While the national average of small business ownership is 22%, Maine is slightly ahead of that with 23%, and seven Maine islands and coastal communities have small business ownership at over 50%. (Waypoints 2018).
As part of the Island Institute’s Island and Coastal Business Launchpad program, we can help you with everything from business startup and setup, funding, and how to manage the finite time you have to get everything done. Learn more here.
What We Do
The Island Institute’s Small Business Team provides business and financial planning to help entrepreneurs navigate the complexities of starting and growing a business. For more information on our small business support services, feel free to contact Craig Olson.
Commercial Currents is an email and blog newsletter that shares buoyant stories from Maine’s island and coastal communities about economic stability and resilience. To find archived editions, go to islandinstitute.org/blog/economic.
Know someone who’d enjoy these emails? Subscribe here.