By BECKY GILLETTE
The past year has been a busy one for tax advisors due to changes in income tax laws for both individuals and businesses.
“The new tax law did not make taxes simpler,” said Ted Edwards, CPA, senior member in charge of tax services for Haddox Reid Eubanks Betts PLLC, Jackson. “So, it is going to be a very interesting tax season for us. We’ve had quite a lot of conversation about that. It is going to be very different. The tax changes have benefited both small and big businesses. I think generally individuals are going to benefit, as well. There will be some who won’t. We have already learned that. It will hurt them. It all depends on their particular tax situation.”
Edwards said it is important to understand the new tax law so you can know how to use those changes to benefit your business or as an individual.
There are still some unknowns.
“Because of the changes, both individuals and business owners have been trying to find out what real effect it is going to have on them,” Edwards said. “We have had a lot of meetings and made many calculations trying to let our clients know what we believe it will mean to them. We have to wait to see how it plays out as we start to prepare the tax returns in the upcoming tax season. In that regard, as is the case with so many tax laws that Congress has passed and continues to pass, there’s uncertainty as to how the provisions may necessarily work.”
One big change affected business that operate as a C corporations is that there is now a flat 21 percent rate, while in the past it was a graduated rate schedule with the top being a 35 percent rate.
“That is probably primarily a benefit to larger companies, but could be a benefit to medium-sized companies, as well,” Edwards said.
Regarding businesses, Edwards said the IRS issued some proposed regulations in August giving guidance on one of the most significant tax breaks for businesses, the section 199A deduction.
“But there are still unanswered questions that we are currently trying to work with,” Edwards said. “The 199A deduction is a 20 percent deduction that eligible taxpayers will benefit from. That is going to be a very beneficial for many businesses. Also, there were some favorable depreciation provisions in the tax bill that will allow any business to expense and deduct expenses that in the past they would have had to capitalize and depreciate over a period of time.”
Albert Sappington, CPA, manager of construction tax services for HORNE LLP in Ridgeland, said they are advising clients to do adequate tax planning to take advantage of the 199A 20 percent deduction.
“We make sure through our planning to maximize that deduction and that we are factoring in that deduction in our planning,” Sappington said. “Usually the owner has to take cash out of the company to pay the tax, especially if it is a flow through entity. Knowing how much cash needs to be distributed to pay the owner’s tax is important because that can affect business decisions.”
For example, if business owners know they have to pay $100,000 in taxes April, they might hold back on investing into the business.
Companies in the construction industry are heavy on equipment cost,” Sappington said. “I have my clients talk about any equipment they might need over the next six months. Maybe it makes sense to buy that equipment and place it in service now instead of waiting until the next year so we can take accelerated depreciation to reduce the current year taxes that are due.”
A big change in Section 179 depreciation deduction is that the previous $500,000 limit has been increased to $1 million. Sappington said that is very significant. Another big depreciation change is bonus depreciation which went from a 50 percent write off to 100 percent.
“In the past you could only take bonus depreciation on new equipment,” he said. “And for 2018 forward, you can take it on new and used equipment that you purchased. Depreciation is a big one. That affects a lot of our clients. Contractors always need a new piece of equipment. The key is making sure they buy in the right tax year to provide the most benefit for taxes.”
For individual income taxes, the tax bracket change will mean people will pay one to two percent less tax than prior tax rates. Sappington said that is not a huge change, but it is a benefit.
Another major change for individuals is the elimination of the exemptions for the individual, spouse and children. But the IRS increased the standard deduction to $12,000 for singles and $24,000 for a married couple.
It is actually an increase from $6,350 for singles and $12,700 for a married couple from the prior year,” Sappington said. “It almost doubled. One thing to understand about the new tax law is it is referred to it as a balanced budget. If you cut taxes for one group, others increase. Some individuals will pay more taxes and some will pay less. We want to make sure our clients fall on the better of the two sides, if possible.”
Another thing that changed the child tax credit. In prior years that was only a $1,000 credit per child. Now it is up to a $2,000 credit per child.
“So, you don’t get those exemptions for your children anymore, but get a $1,000 increase in tax credit,” he said. “That is a dollar-per-dollar reduction in taxes. The child tax credit going up is a good benefit for many taxpayers.”
Sappington recommends using a tax professional as a business partner throughout the year to help you make educated decisions for your business and on your individual investments.
“A lot of people don’t understand the need and benefit of tax planning,” he said. “We are trying to be proactive and do things now that help you pay less tax instead of just telling you what you owe at filing time. I never want my clients to be blindsided by a large tax liability. Understanding what the tax liability will be through planning helps the client plan for the cash outlay and also provides a higher level of tax service.”
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