Many small-business owners across Durango are mulling just what the sweeping federal tax reform President Donald Trump signed into law at the twilight of 2017 means for them in 2018 and beyond.
“I’m still trying to figure out everything. I guess from what I’ve heard, there’s some good things, some bad things, but it’s complicated. I guess that’s part of the problem. Complication is some of the worst part of tax season, all the details,” said Rod Barker, owner of the Strater Hotel.
Barker’s uncertainty about tax reform and what it means to his tax bill is widespread. Dozens of Durango business owners expressed similar uncertainty about just what the tax changes, most of which went into effect Jan. 1, wll mean when April 15, 2019, the tax filing deadline for 2018, rolls around.
Because rules and regulations are still being written – and they aren’t expected to be finalized until well into February – Chuck Fredrick, certified public accountant and co-owner of FredrickZink & Associates, said a small-business owner’s uncertainty about tax reform is understandable.
The good news for most small-business owners: The vast majority of them are going to benefit from a 20 percent deduction in business income reportable for taxation.
The deduction is the chief reform affecting partnerships, limited liability corporations, sole proprietorships and S corporations.
“It should lower the effective amount of taxes small businesses pay,” Fredrick said.
John Lopez, a certified accountant with FredrickZink, added, “It amounts to a 20 percent cut in income for most businesses; that’s a huge benefit.”
Mike Slack, a tax research analyst for H&R Block’s Tax Institute, said the goal of the 20 percent deduction in income for small businesses is to make small firms more competitive with their bigger corporate competitors: The tax rate for incorporated businesses went down from 35 percent to 21 percent.
“The reduction in corporate taxes was so big, this was added to keep competition on a more level playing field for small businesses,” Slack said.
The good news for tax consultants like FredrickZink and H&R Block: The reforms are complicated, and tax reform that once promised simplification instead promises to keep tax-preparation businesses working overtime.
The chief complication with the 20 percent deduction in business income is that the benefit phases out for single-filers with a taxable income above $157,500 and $315,000 for joint-filers who are “service professionals” – such as doctors, lawyers, engineers, architects, accountants, consultants and some other professional occupations.
“The income deduction is a large amount of money, but you may not be able to take advantage of it if you are a lawyer, engineer or doctor,” Slack said.
Another big benefit for small business is an acceleration in the speed in which small businesses can expense depreciation of capital investments such as tractors, vehicles, furniture, software, computers and manufacturing equipment.
Tax reform increased the maximum amount a small business can depreciate under one section of the law from $500,000 to $1 million and allowed for immediate depreciation in one year rather than depreciating the asset over five years.
A number of other changes to depreciation of capital also will benefit business owners, so checking with a tax expert to see how remodeling, upgrading and replacing equipment might benefit an individual’s tax bite would be a good idea.
“For some businesses, an office environment, it’s not a big deal. How much furniture do you need?” Fredrick said. “But for contractors and farmers and ranchers, this could be a substantial benefit to them.”
In addition, many depreciation rules that were once limited only to new equipment now also apply to the purchase of used equipment, Frederick said. “People are going to be able to expense more things under the new law,” he said.
Lopez said the key rationale behind many of the tax changes, including the expansion of eligibility for deductions, is to spur economic activity.
Will it work? Time will answer that question.
Trump’s expectation is that the bill will torque up the economy and not just by benefiting businesses.
During the signing ceremony as he held up the page with his signature on the bill, he said: “I consider this very much a bill for the middle class, and for jobs. Corporations are literally going wild for this.”
One final major change that holds the potential to benefit small, family businesses is the exemption from the estate tax that has been expanded to $11.2 million in the value of an estate before it is hit by the 40 percent tax. Previously, estates with a value of $5.6 million were hit by the so-called “death tax.”
Finally, certain rules for deductions for things such as food and entertainment have been tightened, a further reason to call a tax expert.
Questions have been coming to FredrickZink since passage of the tax overhaul, and Fredrick said he is planning to offer information to clients via seminars on particular tax subjects, website updates, and he urged any business owner with a question to call.
“Sometimes, you can answer a question easily; sometimes, it takes some work before you can get to the right answer,” he said.
He added: “It will be interesting over the next six months as we get more commentary and rules finalized. Ultimately, this has to work itself out in how you fill out a form.
“You think you understand it, and then you start to fill out a form, and that’s when you find out how well you really do understand it.”