As we get into the heart of tax season, most shop owners are going to start seeing the effects of the Tax Cuts and Jobs Act that went into effect in 2018. We are going to cover some expenses that might have been modified, added, or even removed. We will also go over some of the major changes and how to make them work in your benefit.
Entertainment expense has been eliminated as an allowable deduction for 2018 taxes. In the past, if you took a client to a football game or out on a boat trip you could deduct 50% of the cost as an allowable expense. This year that is gone altogether. One thing that we are telling all our clients is to remove the word “Entertainment” from any of their expense accounts in Quickbooks. The standard account title for meals is “Meals & Entertainment” and we are having our clients change it to just “Meals.” “Meals” are mostly unchanged and still available for a 50% deduction, but by having the word “Entertainment” on the account, you risk misclassification by your accountant or a possible issue down the road if audited.
Home Office Deduction
Some of our clients deducted part of their household expenses for the business use of the home. However, unreimbursed employee expenses are no longer deductible on your personal tax return. What we are having our clients do is set up an accountable direct reimbursement plan for their home office. In short, you calculate the expense of having the home office and bill your company for that cost. The company is then able to reimburse the owner for a full deduction and tax-free income to the owner. Win-win.
Tools and Uniforms for Employees
Since unreimbursed employee expenses are no longer deductible, your employees will no longer be able to deduct the cost of their tools, dues, or uniforms. This was a fairly large deduction for a lot of technicians, but also something that was widely abused. Some creative ways that our clients have gotten around the new change is to set up a tool plan for their employees. By treating some money paid to the tool truck each week as a fringe benefit, you are creating a deduction for the business and tax-free and cash free tools to their employees.
Pass-Through Entity Deduction
Businesses that are set up as an S-Corp, Partnership, or Sole Member are now eligible for a 20% deduction of business income. That means that if your shop made $100k in 2018, you only have to pay tax on $80k. This is one of the biggest benefits in the new tax code and is aimed at small businesses which is a huge step in the right direction. Almost all our clients are seeing major benefits from this already. Self-rentals, if you own your building personally or through another LLC, also qualify for this deduction. C-Corporations do not qualify for this deduction and is another major reason that it doesn’t make sense for shops to stay as a C-Corporation. While there are costs associated with switching from a C-Corp to an S-Corp, most shops triple their money spent on the conversion in tax savings in the first year.
Expanded Section 179 and Bonus Depreciation
This is an underlooked and underappreciated change in the 2018 tax law, but it is making major changes to how we can depreciate and deduct large capital projects. You are still able to fully depreciate and expense equipment, but most leasehold improvements have been added to this as well. In the past, if you made major renovations to your building, we had to depreciate those over the course of up to 39 years. For 2018, most of these costs can be expensed immediately. Major deductions in the first year for investing in your own property is something that we can get behind.
For more information about any of these or how it will affect your business, please contact us at any time. 301-829-4646