A Change in Tide on Tax Reform
By Rebecca Lake
Tax reform is always a hot topic, particularly among small business owners. When the Tax Cuts and Jobs Act took effect at the beginning of 2018, many small business owners were uncertain about the potential impacts — and whether they'd pay more or less in taxes moving forward.
With tax season approaching, Capital One's fall 2018 Small Business Growth Index suggests that business owners are taking a proactive approach in understanding and preparing for new tax law changes.
Talking Tax Reform Is a Priority
Tax reform isn't something business owners want to navigate alone. According to the survey, 78 percent of small business owners have either met or will meet with their accountant or financial advisor to discuss the tax plan.
Adham Sbeih, CEO and founder of Sacramento-based real estate investment firm Socotra Capital, says there are two central questions he's hoping his advisor can answer:
● How does tax reform affect me?
● Is there anything I should be doing differently to impact our tax liability?
Those are important questions, considering the scope of the changes accompanying the latest round of tax reform.
"The more discussions, the better the business owner gets to understand the impact of the tax act," says Lynn Udovich, senior tax manager at New York-based accounting firm NYBKW.
Changing Perspectives on Tax Liability
A chief concern with tax reform for small business owners is the likelihood of it resulting in a larger tax bill.
"I'm looking forward to running our tax return both under the old scenario and the new laws to see what difference, if any, it's had on us," Sbeih says. "I feel optimistic that we will find opportunities to take advantage of the new tax code."
According to the Small Business Growth Index, 52 percent of small business owners feel they'll pay the same in taxes in 2019, up from 41 percent in spring 2018. At the same time, the number of business owners who expect to pay less in taxes in 2019 dropped from 36 percent to 20 percent.
That suggests that business owners are taking time to learn more about the tax changes that are set to affect them directly, and that many are less optimistic than they were earlier in the year.
"Under the new tax law, many pass-through businesses, such as S Corporations, LLCs, partnerships and sole proprietorships are allowed an important tax deduction that's tantamount to excluding 20 percent of qualified business income," Udovich says. "This deduction combined with lower tax rates under the new act tends to offset the fact that certain itemized deductions, such as state and local income taxes and real estate taxes, have been reduced or eliminated."
Tax reform also brings a change to the rules for cash accounting, allowing businesses with average gross receipts of $25 million or less to use the cash method. Udovich says this change could result in a tax windfall for businesses that were previously limited to using the accrual method.
Don't Delay Tax Reform Planning
The results of the Small Business Growth Index offer some encouraging insight into small business owners' perspective on tax reform. If you've put off meeting with your CPA or advisor, it's not too late to get the tax conversation started.
That includes running projections for your estimated tax liability under the new tax law and exploring different opportunities to reduce taxes. Planning and communication can help you avoid surprises and get clarity on the new tax rules.
"One of the biggest misconceptions is that the tax act only impacts huge, international companies — but that's far from the case," Udovich says.
There are meaningful tax-savings opportunities to be had, but you'll need to take the time to look for them. That's where your advisor or accountant can prove helpful.
"Tax reform is an opportunity to be creative, and it will affect each business and business owner differently," Udovich says. "It's important to have an ongoing dialogue with your tax professional."
Learn more about the Capital One Small Business Growth Index at: http://www.capitalone.com/smallbusinessgrowthindex