Joyce M. Rosenberg

Small business owners still uncertain about tax law impact

NEW YORK (AP) — Five months after massive federal tax changes became law, many small business owners still don’t know whether they’ll be winners or losers. Mike Kaeding would like to know how his real estate development and management company will be affected by two big changes — the deductibility of business meals, and a 20 percent income deduction for many owners of what are called pass-through businesses. Big corporations already know their tax rates are falling, and all businesses can get bigger deductions for equipment purchases. But small business owners and tax advisers are still waiting for the IRS to write regulations and guidelines explaining and enforcing many parts of the law that is itself more than 500 pages long. “We have a high level of uncertainty and that makes it difficult,” says Kaeding, president of Norhart in Forest Lake, Minn. The American Institute of Certified Public Accountants, a professional group, has asked the IRS to expedite regulations on business meals and the 20 percent deduction. Ken Rubin, a CPA with Rubin Brown in St. Louis, says clients have been asking his opinion about what is and isn’t deductible. “These are unclear, significant items that small businesses are worried about,” says Rubin, who is also a member of the AICPA’s tax executive committee. Small corporations structured like General Motors or Apple know they’ll have a 21 percent tax rate, compared to a previous range of 15 percent to 35 percent — the same change the big companies are getting. And many small manufacturers and construction companies will be able to use what’s known as the cash basis method of accounting, a much simpler system than the method required before. But a survey of 603 owners taken in early April by Wells Fargo and Gallup showed many owners were still in the dark. Thirty-nine percent said they don’t know how the law will affect their companies. A third said it had already helped their companies or would do so, and 27 percent didn’t expect it to benefit their businesses. For owners of pass-through businesses — sole proprietors, partners and owners of companies structured as S corporations — the uncertainty around the 20 percent deduction comes from the list of ways they could be disqualified. For these companies, the business income is “passed through” to the owners’ 1040 forms, and they pay tax based on individual rather than corporate rates. Certain business owners like lawyers, accountants, doctors and consultants won’t qualify for the full deduction unless their taxable income is below $157,500 for single filers or $315,000 for joint filers, and the amount of the deduction will decline as taxpayers’ incomes rise. The same goes for business coaches, public speakers, therapists — according to the law, any trade or business whose principal asset “is the reputation or skill of one or more of its employees.” But the IRS has yet to weigh in on a number of issues, including the calculations businesses must make to determine the income that can qualify for the deduction. Some owners know they will get the deduction and plan to make the most of it, including Larry Patterson, who owns a Glass Doctor repair franchise in Carrollton, Texas. “I have more money to invest in growth,” he says. He plans to expand his company’s premises and do some hiring. But Ted Ma, who has two businesses, one as a public speaker and the other in sales, says he’s in limbo. “The lack of clear information available to determine exactly what applies to my situation has been both confusing and frustrating,” says Ma, who lives in Point Richmond, Calif. He’s not sure as he makes quarterly estimated tax payments whether he’s overpaying or underpaying. He also wonders as he takes prospective clients and customers out for meals whether he’ll be able to deduct them. “The meal is a major part of how I do business,” he says. “That’s another source of frustration and confusion.” The uncertainty as the IRS writes the regulations could last into 2019 and beyond. “Regulation projects can range from months to years — if ever finalized. And each project takes a different amount of time,” says Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. Many accountants have started making educated guesses. CPA Angela Dotson expects most small businesses to pay less in taxes. Owners who have multiple businesses will have more uncertainty, but “the bread-and-butter companies that hire most people, they’re not going to have the most issues,” says Dotson, who’s with the accounting firm Aprio in Atlanta. But smaller corporations aren’t guaranteed a windfall. David Arena’s real estate photography and marketing company had a profit last year low enough to give Alcove Media a tax rate of 15 percent. He’s expecting a 6 percentage point jump this year. “I would have liked to maybe see a tiered (corporate tax) system again,” says Arena, whose company is based in Bala Cynwyd, Pennsylvania. Owners who are uncertain or who know they’re not likely to get a break can take steps to lower their tax bill, says Loreen Gilbert, owner of WealthWise Financial Services, an advisory firm based in Irvine, California. Gilbert points to herself as an example: She doesn’t expect to get the 20 percent deduction, so she’s putting more money in her retirement account. Business owners should also meet as soon as possible with accountants to get a sense of how they could be affected, says Monic Ramirez, a CPA with Sensiba San Filippo in Morgan Hill, California. “So much has changed in the new law. You need to sit down with your tax preparer and see what parts of this are going to benefit your company and how can you position yourself to take advantage of it,” she says. Kaeding, though, is concerned about the cost of complying with the law — he expects a higher bill from his accountant. And the confusion is a distraction from running his business. “All the time we spend understanding the tax system does not help our customers,” Kaeding says.

Small businesses look to Congress for action

NEW YORK (AP) — With Congress back at work, small business owners are hoping issues they care about like tax reform or health care will get some attention. They may be left waiting a while. Most of the focus this fall will likely be on the presidential race and other elections. Both houses of Congress are in session during September, then leave for campaigning. They have four scheduled weeks of work starting Nov. 14 in what's known as a lame duck session, but how much lawmakers accomplish then may depend on the results of the presidential voting and which party controls the House and Senate. "There will be a lot of things that will be kicked down the road, and that just continues to cause more uncertainty and unpredictability for small businesses," says Karen Kerrigan, president of the Small Business & Entrepreneurship Council. Meanwhile, small business groups want to see how much attention their wish list gets from the presidential campaigns of Democrat Hillary Clinton and Republican Donald Trump. The Congressional Agenda Kerrigan is optimistic about some bills that have support from both parties, including legislation that would let small businesses offer employees Health Reimbursement Arrangements, or company-funded savings accounts that staffers can use to pay medical bills. HRAs became illegal under the health care overhaul. The bill has passed the House. Another measure with bipartisan support that Kerrigan says has a chance of passing would modify online crowdfunding investment that became legal in May. The bill, which has been approved by the House, would raise the total that a company can raise from individual investors to $5 million from $1 million. It also would allow a fund known as a special-purpose vehicle or single-purpose vehicle to buy shares on behalf of a group of individual investors. That would make crowdfunding more attractive to venture capital or private equity funds that invest on behalf of others. Some legislation could pass by being attached to appropriations bills that will be the priority during the lame duck session, says Todd McCracken, CEO of the National Small Business Association. The NSBA is hoping Congress reauthorizes the Small Business Innovation Research program, under which companies can participate in projects to develop technology products for the government. The program must be authorized by 2017 to continue funding projects, but advocacy groups want Congress to act this year so it doesn't fall through the cracks during what's expected to be a busy legislative session next year. The group also wants Congress to approve President Barack Obama's nominee to the board of directors of the Export-Import Bank, an agency that makes and guarantees loans so U.S. companies can export their goods. Three of the five board seats are vacant, and without a quorum, the bank cannot make loans over $10 million. Obama nominated Mark McWatters, who has held a variety of federal and Texas state government positions, to fill the seat, but the nomination has stalled in the Senate Banking Committee. The National Federation of Independent Business wants lawmakers to amend federal regulations including rules taking effect Dec. 1 that require an estimated 4.2 million workers to be given overtime pay, spokesman Jack Mozloom says. In an NSBA survey of business owners released Wednesday about the issues they want Congress and the president to address first, just over a fifth mentioned reducing the national deficit, and 19 percent said they should end partisan gridlock and work together. Fourteen percent mentioned simplifying the tax system, and 11 percent want health care costs addressed. The survey questioned more than 1,000 owners, including members and non-members of NSBA, from July 22 to Aug. 3. What the Candidates Say Although much of the focus of the presidential campaign has been on the candidates' personalities, they have made spoken about some issues that affect small business. Clinton has released proposals including: — A standard deduction for expenses similar to the ones available to individual taxpayers. She also wants to increase the equipment and property tax deduction known as the Section 179 deduction to $1 million from the current $500,000. — An expansion of the small business tax credit under the health overhaul to include employers with up to 50 employees, up from the current 25. —Reducing regulations that limit small business lending by community banks and credit unions. Trump's proposals include: —A 15 percent maximum tax on business income. —A review of all regulations on businesses with an eye to eliminating the least critical to health and safety, and regulations including Environmental Protection Agency rules covering streams on private land. —Renegotiating the 22-year-old North American Free Trade Agreement and withdrawing from the Trans-Pacific Partnership, which is awaiting approval from Congress. Small business advocates say they'd like to see more details from both candidates. The National Federation of Independent Business wants to know whether business owners whose companies don't pay corporate taxes — partnerships and sole proprietors — might also see their rates fall, Mozloom says. What to do in the Meantime? Surveys this spring showed small business owners were scaling back expansion and hiring plans, in part because of uncertainty about the election. But there won't be a new Congress and administration until January, meaning owners could be in limbo. "They're in a holding pattern, waiting to see what's going to happen," Mozloom says. Depending on the election results, slow progress on small business issues could last into in 2017. Owners might want to consider just moving ahead, says John Arensmeyer, CEO of the Small Business Majority. "I don't think they should be waiting around to make business decision based on who's going to get elected," he says. Follow Joyce Rosenberg at www.twitter.com/JoyceMRosenberg.
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