I recently posted an overview of the changes for small business in the recent tax law. We’ve delved into the detail a little more, and have an update with some thoughts on strategies going forward:

Estate Taxes

The basic exclusion for estate and gift taxes was raised to $10 million per person, but revert back to current exemption of $5 million in 2025. While most taxpayers fall below these exemptions, the higher interim limits allow significant opportunities to save taxes and pass on wealth to future generations. If you’re not sure whether the estate and gift taxes apply to you and your business, ASK! Better safe than sorry.

Itemized Deductions

Because the standard deduction has been increased to $24,000 (Married filing jointly), itemizing deductions will be more difficult. Additionally, state and local taxes have been capped at $10,000 per year. Note that this doesn’t apply to business taxes, just individuals.

One possible strategy is to time your deductions such as taxes and charitable contributions and itemize every other year.

In my last email I stated that casualty and theft losses were no longer deductible. This was only partially correct. Losses occurring in federal declared disaster areas are still deductible.

Medical expenses are now deductible to the extent they exceed 7.5% of adjusted gross income (this is down from the previous limit of 10%). Again, timing of payments might be reviewed to maximize itemized deductions. Long term care insurance again looks like a valuable tax deduction for some taxpayers.

Education

Distributions from 529 plans can now be used for up to $10,000 in qualified expenses for elementary and high school. This is a significant benefit to those with children in private education.

Although there were discussions, interest expense on education loans is still deductible. The Lifetime Learning and American Opportunity Tax Credits were also retained.

Small Business

By far the most interesting, and complicated, portion of the new is the establishment of a 20% deduction for partnerships, S corporations, and sole proprietorships. There are LOTS of complicated limits and tests for this deduction. In my previous email I stated that certain professional businesses were not allowed this deduction. This was partially correct. A deductions for designated professional businesses are subject to an income limit beginning with a phase out at $315,000 (married filing joint). It is completely phased out at $415,000, but a dollar earned in between the two can increase your taxes by $1.60! So really you need to worry about staying below the $315,000 limit.

A professional service business is defined as any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees. Interestingly, this definition excludes architects and engineers. Better lobbyist I guess!

For many small business this won’t be a challenge, but for those with higher income, planning is now critical since the deduction is computed by legal entity, and is subject to other limits. For professional businesses, defined benefit retirement plans are now a must to look at. If you haven’t considered, please ask us!

We’re still learning.  One thing is for sure, you MUST talk to us about YOUR situation, or you will pay too much tax!  Schedule an appointment now!