Tax for Small Business Dummies PART 1

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Beware the Ides of March.  Perhaps April deserves a bad reputation.  For small business owners and sole proprietors, ’tis Tax Season. At least March has the NCAA tournament.

In response to recent questions posted by clients and my friends at TigerLabs, I’ve summarized a few tips. Below, in order of relevance are the biggest changes to the tax code in decades and why it matters.

Four (4)  Tax Highlights for 2018, courtesy of Congress:

 

Depreciation  Magic.

I.  Section 179 Expense Deduction.

It’s a dry name for a deduction (taken from a line in the Internal Revenue Code) but it allows you to deduct the entire cost (subject to certain limitations) of an asset in the year you acquire and start using it for business.  Congress approved special depreciation and expensing rules for property acquired in 2018.

II.  Bonus Depreciation

Bonus depreciation has been changed for qualified assets acquired and placed in service after September 27, 2017. The old rules of 50% bonus depreciation still apply for qualified assets acquired before September 28, 2017. These assets had to be purchased new, not used.

The new rules allow for 100% bonus “expensing” of assets that are new or used. The percentage of bonus depreciation phases down in 2023 to 80%, 2024 to 60%, 2025 to 40%, and 2026 to 20%.

After 2026 there is no further bonus depreciation. This bonus “expensing” should not be confused with expensing under Code Section 179 which has entirely separate rules, see above. https://turbotax.intuit.com/tax-tips/small-business-taxes/managing-assets/L18WqppFX (basics of depreciation)

III. (QBI) Qualified Business Income/ IRC Section 199A Deduction

Qualified Business Income deduction (also called the QBI deduction, pass-through deduction, or section 199A deduction) was created by the 2017 Tax Cuts and Jobs Act (TCJA) and is in effect for tax years 2018 through 2025.

This new deduction means that most self-employed taxpayers and small business owners can exclude up to 20% of their qualified business income from federal income tax (but not self-employment tax), whether they itemize or not. 

With the QBI deduction, most self-employed taxpayers and small business owners can exclude up to 20% of their qualified business income from federal income tax (but not self-employment tax) whether they itemize or not.  https://ttlc.intuit.com/questions/4499030-what-is-the-qualified-business-income-qbi-deductionIRS

IV. Property Taxes

 

Starting in 2018, Congress has limited the amount of state and local property, income, and sales taxes that can be deducted to $10,000. In the past, these taxes have generally been fully tax deductible. Deductible property (real estate) taxes include taxes paid at closing when buying or selling a home, as well as taxes paid to your county or town’s tax assessor (either directly or through a mortgage escrow account) on the assessed value of your property.

V.  Check back tomorrow

Turbotax has a top-notch Self Employed Center; https://ttlc.intuit.com/browse/self-employed-center  (e.g. contractor, freelancer, 1099)  

 

Note: Our founder is a tax attorney that works with other experts to develop holistic wealth-planning solutions for small business owners, with a bias to tech firms with cross-border operations.   This means we strictly advise over a period of months and years.  We avoid one-off transactions.

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