NCET helps you explore business and technology
By Mike Bosma
As we swing into tax filing season, many business owners are curious how tax reform is going to impact their tax/cash situation. Below is a summary of “hacks” that every business owner needs to know.
Hack #1 – Negotiate your fee arrangement with your tax preparer. Two percent itemized deductions for, among other things, your tax preparation fees, are no longer deductible. As a rule, most of the complexities on your personal return are the direct result of the business income being reported. Have your tax preparer bill the business rather that you individually for those costs. The fees billed to the business are fully deductible.
Hack #2 – Be smart about how you pay yourself and others. While the intricacies of IRC §199A are beyond the scope of this article, how you pay yourself and others matters. The 20 percent 199A deduction has several limitations you need to be aware of. Chiefly, any wages you paid yourself do NOT qualify for the deduction, but income from your business does. Consider lowering your wages paid from your S Corporation (Pro tip: you have to pay yourself a reasonable wage from your S corporation). Also know that you do NOT need to pay yourself a salary or guaranteed payment from your sole proprietorship or partnership.
Hack #3 – Don’t get tricked into thinking the 21 percent corporate tax rate is lower than the 29.6 percent rate on flow-through income. Yes, the 21 percent rate looks low to the casual observer. The savvy taxpayer knows that entrepreneurs want to get their hands on the cash eventually. When dividends are paid out of the corporation, it triggers an additional tax, up to 23.8 percent. Let’s say you make $100 in your C Corporation. You pay $21 in tax. You then pay the $79 remaining (100-21 in tax) as dividend. Assuming you are in the highest marginal tax bracket, you would pay an additional $18.80 in tax ($79 times 23.8 percent). Your total tax paid on the $100 in earnings is 39.8 percent ($21 plus $18.80). If you were an S corporation, you would have paid $29.60 in tax on the $100 earnings. $100 in earnings, less $20 in IRC §199A deduction, times 37 percent tax rate = $29.60.
Hack #4 – How you pay your peeps matters. Generally, single entrepreneurs with pass-through income or other qualified business income over $157,500 will be limited on their §199A deduction, if you don’t have sufficient wages or capital investment. As previously mentioned, you cannot pay yourself a wage as a sole proprietor or partner. Re-negotiate independent contractor arrangements you have with your consultants. You can generally pay them a little less since you are covering half of their FICA and Medicare taxes.
These hacks are the low-hanging fruit! The list goes on and on. I will be doing a deep dive on tax hacks every entrepreneur needs to know during NCET’s Biz Café on Jan. 16.
NCET is a member-supported nonprofit organization that produces educational and networking events to help people explore business and technology.