Understanding Tax Changes as a Small Business
Some changes to the tax code are posing a bit of a problem for small businesses. Luckily, if you are aware of the change, it shouldn’t cause you any stress.
A critical question for lower middle market business owners is whether they can claim a new deduction aimed at small business owners. The law allows owners of many of these companies to deduct 20 percent of what’s known as qualified business income. But the IRS’ guidelines set income thresholds — $157,500 for an individual and $315,000 for a married couple filing jointly. Owners with taxable income up to those amounts can take the full deduction, and a partial deduction is possible above those limits. The calculations for the deduction are complex, and there’s a wrinkle for owners whose companies are what’s called a specified service trade or business — for example, health providers, attorneys, accountants or consultants. They have no deduction if their taxable income is more than $207,500 for an individual or $415,000 for a married couple. The amount of the deduction may be affected by the compensation owners pay their employees. And owners with multiple businesses also must determine which of their income sources qualify for the deduction.
There’s also the question of incorporating. The law provides for a big reduction in the corporate tax rate, to 21 percent from 35 percent. That had many owners asking financial advisors whether they should convert their sole proprietorship, partnerships and S corporations to what are called C corporations to take advantage of the lower rate. Probably not, was the answer. C corporations, the structure used by the nation’s biggest companies, are taxed on their income, and their shareholders, including some small business owners, must then pay tax on dividends. While some people may have been thinking a C corporation may be better, the double tax part of it knocks out a lot of the opportunity for savings. There may be some businesses that will benefit from becoming C corporations, however. An owner who expects to take a company public needs to structure it as a C corporation. An owner who doesn’t plan to pay dividends doesn’t have to worry about double taxation.
It was clear when the law was enacted that companies could no longer deduct the cost of entertaining clients; there’d be no more breaks on theater or sports tickets or golf fees. It wasn’t clear until the IRS issued guidelines last month that money spent on food — taking clients out to dinner or bringing in meals for staffers — would still be 50 percent deductible.
With all of the new changes, financial advising couldn’t come at a better time and be more necessary. With many headlines focused on the bigger companies around the world, lower middle market businesses can turn to SA Capital Partners for advising, guidance, and a clear understanding of changes to come.
About SA Capital Partners:
SA Capital Partners is an innovative financial services firm that specializes in mergers & acquisitions advisory and capital raising for lower middle market businesses. We aspire to give all the tools necessary to complete any transaction. SA Capital Partner’s financial services industry specialists provide comprehensive, integrated solutions to banking transactions. Our breadth of services and industry knowledge allow us to understand each client’s unique business needs. Our goal is to make all financial services available to every small business.