In today’s blog post and video, we’re covering the Tax Cuts and Jobs Act, particularly how the new tax law changes apply to business owners. The tax law was recently simplified for many individual taxpayers, but for businesses, it’s more confusing.
I interviewed Ryan Zamudio, CPA, and he talks about some of the tax changes for 2018 that are going to impact most business owners.
Here’s what Ryan believes are going to be the biggest things business owners will need to pay attention to from the Tax Cuts and Jobs Act:
- Deduction for flow-through entities (impacting C-Corps and S-Corps)
- Deduction of qualified business income
- Limitation of state and local taxes on Schedule A itemized deductions
- Elimination of the deduction for entertainment
- Limitation of Interest Deduction for Debt
- Domestic Production Activities Deduction
This is the biggest change to the tax system since the 1980’s, so there is a lot to absorb and digest!
Click here to watch the full interview or read the full interview transcript, below.
Ashley: Today’s video is a little bit different. I’m here with my friend Ryan Zamudio, who is a CPA, and we’re talking about some of the major tax changes that have come out of the new Tax Cuts and Jobs Act of 2017? Is that what it’s called?
Ryan: That’s right, that’s what it’s called.
Ashley: Okay. Ryan and I have known each other … how long have we known each other?
Ryan: 10 long years now.
Ashley: A decade, wow.
Ashley: So, Ryan, you’ve been a CPA now for how long?
Ryan: Since 2012.
Ashley: I’ve seen how the end of the year is rapidly approaching and a lot of our clients, especially business owners, are going to start thinking about taxes. We really want to focus today on some of the major impacts of this new Tax Cuts and Jobs Act, particularly things that are going to impact business owners.
Ashley: It’s interesting, for a lot of individuals, it’s much simpler now with the standard deduction.
Ashley: But for business owners, there’s some things that might help them. There’s some things that might hurt them. It’s a little bit more complex.
Ryan: We like to provide tax planning to give them a heads up as – hey, this is what’s going to happen. And especially with this new tax law, we want to try to make the muddy waters a lot more clear.
New Tax Law Change #1 – Deduction For Flow Through Entities
Ashley: Of all the tax law changes that are coming out of this, particularly for businesses, what’s the one that’s going to impact the most people?
Ryan: The one that I would see impacting the most people, especially in our market as most people have closely held businesses, would be the deduction for flow-through entities. It involves a couple of different things. Qualified business income is a part of that, and there’s two different tests for it. One’s based on taxable income itself, and one is based on whether you’re a service company or not. So, it’s a two-pronged test whether you can realize that full deduction.
Ryan: But it is one that will affect most people. It’s brand new, a completely new aspect of tax law and it’s not a modification on anything. Basically, it comes down to taxable income. You have to be below a certain threshold. For example, $315,000 is the magic number for flow-through’s. If you’re below $315,000 of taxable income, you can take a 20% deduction of qualified business income right off the top. It provides a lot of tax savings.
Ryan: And the reason why they did this is, moving into a next point of the tax law, the corporate tax rate itself is a flat 21%. This applies to C Corps only, not flow-through’s. It’s a flat 21%. It’s not graduated and there are no steps.
Ashley: So, whether on the little C Corp or on the world’s largest organization …
Ryan: All 21%.
Ashley: How do you think that’s going to influence businesses who are C Corps in their behavior and what they do?
Ryan: One thing is, especially if a person has multiple entities, you really need to take a look and see if a C Corp benefits you or not.
Ashley: So, you might see a lot of people who are changing the way that they’re …
Ashley: Okay. So, if they were maybe the S Corp but maybe now it makes sense for them to become a C Corp?
Ryan: Yeah, it might. Not saying it’s going to, but it might.
Ashley: Something to look at.
Ryan: Yeah, it’s something to look at and really get in touch with your professional, your CPA or your accountant, to see if it’ll work for you.
Ashley: I think where you, as a CPA, provides so much value because you do have the tools to really do a side by side comparison and say, okay, what’s going to make the most sense for your particular situation.
New Tax Law Change #2 – Limitation Of Scheduled Itemized Deductions
Ashley: What’s next? What else is changing that is big, that’s gonna impact a lot of people?
Ryan: Well, another new tax law change, especially here in Oregon, is the limitation of state and local taxes on Schedule A itemized deductions. The big one is, it’s capped at $10,000. If you have a very successful business, you are paying taxes, it’s just a matter of fact. Typically, you pay Oregon a tax too, anywhere up from 9% to 9.9%, we’ll say. That deduction that you can take on Schedule A is an itemized deduction… or not that deduction, that payment of those taxes. You can take it as a deduction.
Ashley: So, if I’m paying taxes, if I’m a business and I’m paying taxes to Oregon, I can deduct those taxes on my federal taxes?
Ryan: Which can be, right, a rather large benefit.
Ryan: Now that is capped off. It’s limited at $10,000, regardless of who you are.
Ashley: Okay, so that might hurt people if they’re paying a lot in state taxes, more than $10,000, whereas they can deduct that before. What was the limit before? Was there …
Ryan: There was no limit.
Ashley: Oh, okay.
Ryan: You could deduct as much as you wanted on Schedule A.
Ryan: But at this point it’s capped at $10,000 regardless. So, that’s another thing people need to look at. Consult your CPA, consult your trusted advisors, and see if you possibly might be paying more in federal tax. You possibly won’t be able to itemize next year, because the standard deduction has gone up. Which is a good thing.
Ryan: But if you’re paying a lot as a W-2 employee in state taxes, make sure you’re paying in enough.
Ashley: Yeah, okay.
New Tax Law Change #3 – Entertainment Deductions
Ashley: The other thing that I heard is changing is entertainment, so talk about that.
Ashley: Are your clients upset about that?
Ryan: Yes. A lot of people have this idea that they can go buy Blazer tickets, Seahawks tickets, and if they’re entertaining clients, they were typically able to take a deduction for it on their tax returns subject to a 50% limitation. That is completely gone, it’s off the table. There is no more deduction for entertainment at this point. The deduction for meals is still there. Business entertainment for employees, things like that, those are always… holiday parties, those are 100% deductible.
Ashley: Okay, so there’s some little nuances. But, if I want to take my client to a Blazer game or if I want to play golf with my client, I can’t deduct that anymore.
Ashley: I can still pay for it through the business, but I’m not getting any tax benefit.
Ryan: Yeah, it just becomes a nondeductible item on your tax return.
Other New Tax Law Changes – That Could Impact Your Business
Ashley: All right, so, those are the big … the C Corp, S Corp, changes to that, you’ve got the entertainment that we just talked about. And then what’s happening with state taxes and the limitation on the deduction there. What else is changing that you think is going to impact quite a few people?
Ryan: There’s a few other items, and they involve business interest, business interest if you are using debt to finance your company. Business interest can be subject to certain limitations. There is like-kind exchanges are for real estate only. You can no longer do it for vehicles, things like that.
Ryan: The last new tax law change, I would say, is the Domestic Production Activities Deduction is no longer. So, if you were in manufacturing, construction, you’re realizing this nice little deduction that you can take on your return, that’s out the window now. It simplifies it for us as tax professionals but it may or may not cost a business owner.
Ryan: For the most part, especially in the state of Oregon, Oregon follows federal law, for the most part. Another thing to keep in mind, actually backtracking is, Oregon law may or may not disconnect from the federal law in terms of how your individual tax returns are processed. And I’ve said this many times, and I’ve actually presented this in front of a few different business groups, you really need to be in touch with your professional. Have them help you make those really key decisions. We don’t like surprises, even as CPAs.
Ashley: You mean, not just tax-wise but if they’re thinking about acquiring or selling property, car, or, stuff like that, so that you can help them navigate the best, and most tax efficient way to do that?
Ryan: Yes, sure. No one likes a surprise when it comes to their finances.
Ryan: Happy birthdays, those… any of those birthday surprises, those are perfectly fine.
Thanks For Watching! Like. Comment. Subscribe
Ashley: Ryan, what’s the best way for someone to get in contact with you?
Ryan: I have a couple of different ways. Email at RyanZ@WilliamsonCPA.com, or just my direct line, 503-303-5003.
Ashley: And I’ll be sure too, that if you want to get in touch with Ryan, if you have questions, comments, you can leave your questions and comments below and we’ll be sure to answer those. But, I’ll also link his contact information in the blog post and in the description of the video, as well.
Ashley: Also, if you like this video, please like, comment, subscribe, to our channel. We post videos almost on a weekly basis, talking a lot about these in-depth topics that are relevant to so many of you.
Ashley: Thanks again for watching. For the key takeaways from this conversation and the full transcript, head on over to our blog. I’ll post a link for that below. Thanks again for watching. Have a great week.
About Ryan Zamudio, CPA
As a CPA, I want my clients to feel like they have a trusted advisor for the financial and accounting aspect of their lives, for the tough decisions and the comparatively easy ones. I want to help them achieve success –whatever that means to them- while remaining compliant with their necessary filings. My clients seek reassurance and peace of mind. That’s what I provide.
- Licensed as a CPA in 2011
- With Williamson & Associates since 2009
Phone: (503) 303-5003