With the tax-filing deadline just days away, entrepreneurs would be wise to ask their tax preparers six key questions. Because the 2018 tax year is the first year the 2017 Tax Cuts and Jobs Act has applied to returns, there are new forms, new rules, new elections and new software that can significantly impact your income.
In short: This tax-filing season is a very different animal than previous ones because there are so many more decisions to make. So, be sure to ask your tax preparer’s advice on both the 2018 returns you’re filing now and the 2019 returns you’ll be preparing or next year.
And, while it may be too late to do a lot about your 2018 return, you can be ready for 2019 if you start preparing now, while your advisor’s information is still fresh on your mind. Here are the top six questions to ask your tax preparer:
1.Should I file an extension?
With the new law impacting tax returns for the first time, filing for an extension is one of the best things you can do. There are new forms, elections and software to deal with; many things have changed; and it’s better to take your time this year. Example: Investment expenses are no longer deductible on a personal return.
2. Should I take a home office deduction?
Also of note is the home office deduction; it’s a bigger deal this year because property taxes and state income taxes, combined, are limited to $10,000; and on top of that, you may not have enough deductions to rise above your standard deduction of $24,000 as a married couple filing jointly. So, the questions should be, first, What would the tax consequence be if I took “home office”? And, second, How do I do that?
3. As an owner, can I qualify for the 20 percent pass-through deduction?
This is a new 20 percent deduction on your net business income, and can significantly impact a small business. If your company is an S Corp, Sole Proprietorship or Partnership, you also need to ask whether you are a specialized service-trader business (lawyer, accountant, consultant).
If the answer is yes, there are income limitations for taking this deduction. For example, if your taxable income is over $157,500 as a single individual, or $315,000 as a couple, then your deduction could be limited.
4. As an owner, should I change from “Accrual” to “Cash” accounting?
If, in the past, your business’s gross income was more than $10 million, you could not use the cash method of accounting. As of the new law, the ceiling has been raised from $10 million to $25 million. Ask your tax preparer if you should change to a cash method.
Then, if you decide to make that change, know that there are elections to be made and forms to file. The cash method lets you pick up income only when it’s received, and take deductions only when they’re paid — versus the accrual basis of accounting, which recognizes income only when it’s earned and expenses only when they’re incurred. If the tax consequence of changing to a cash method is positive — which it is in most cases — ask your advisor, “What has to happen in order to do that?”
5. As a retail owner, should I deduct my inventory for the end of 2018?
Prior to the 2018 tax year, retailers could deduct inventory only after it was sold. The 2018 tax year is the first for which a retail owner can deduct inventory when it’s bought, versus after it’s sold — for items costing less than $2,500.
Why is this important? Consider what happened when I talked about this tax change during a presentation to pharmacists: A participant later told us that his certified public accountant had told him he would owe $400,000 in taxes for 2018, which would put him out of business. After confirming with that CPA that he could deduct his 2018 inventory, even if it was not sold, his tax bill was reduced from $400,000 to $45,000!
As a result, his business was saved, and he remained an important local retailer for those in need of medications. The takeaway: These tax decisions can really matter, not just for you, but for your customers and community.
6. As a real estate investor, do I take a lump sum bonus depreciation or spread it out?
This deduction can be significant, as of the new tax law. For example, a $100,000 investment in real estate in 2018 could produce as much as $150,000 of deduction. So, ask your tax preparer, “If I take the bonus depreciation, how will that affect my tax situation?”
Next ask: “If that depreciation creates a loss for, let’s say, my real estate activity, how can I offset other income with the real estate loss?”
Overall, entrepreneurs must recognize that taxes are their single biggest expense, necessitating that they take the time to learn the most important questions to ask at tax time. The right questions can make a huge difference for an entrepreneur’s business, family and community.
And although all these new questions, elections and forms will likely make tax prep more expensive than it was last year, ultimately entrepreneurs can save millions over their business’s lifetime by asking the right questions now.