“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the spring of hope, it was the winter of despair.” Such is the tale of the 2018 tax return filing season. The tax savings promised by the Tax Cuts and Jobs Act (TCJA) helped many small business owners, while a few did not realize any significant tax savings, and a smaller few failed to take advantage of the deductions offered. Here's a list of a few tax savings that helped small business owners:
100% bonus depreciation deduction
One of the easiest deductions to calculate was the new 100% bonus depreciation deduction. The IRS proposed regulations on August 3, 2018 that provided a roadmap for small business owners to use so they could purchase assets and record the deduction on their 2018 profit and loss statement. The final regulations were released in March of 2019. Small business owners who waited until 2019 and the issuance of the final regulations missed the deduction for 2018. In addition, many off-the-shelf software providers defaulted to the previous 50% bonus depreciation deduction rules if the small business owner either failed or incorrectly entered the information into their software. Business owners who worked with a tax advisor (someone who was aware of the rules and how to report the information) would have had a better chance of making a better business decision during 2018 and, more importantly, calculating that deduction on their 2018 business returns.
Meals and entertainment deduction
Another business expense that changed in 2018 was the elimination of the entertainment portion of the meals and entertainment expense. For a while, articles floated around the internet that the IRS had eliminated both the meals and entertainment expense. This was not true but many small business owners relied on the information. The IRS issued guidance in October 2018 on what constituted a business expense for meals and what was considered entertainment. Small business owners who paid for usual entertainment expenses would not have been able to take those deductions. Tax planning with a trusted advisor could have helped them prepare for or plan on alternatives to taking the deduction. Small business owners who prepared their returns without guidance and with the prohibited deduction, increased their exposure to an IRS audit.
Qualified business income deduction
As mentioned in a previous article, the biggest deduction that interested small business owners was the 20% Qualified Business Income Deduction (QBID) which is calculated on the individual form 1040 tax return. A report by the Treasury Inspector General for Tax Administration (TIGTA) published in March 2019 estimated that 23.7 million individual taxpayers were eligible for the deduction. In that same month the IRS issued final guidance on the new deduction. Small business owners who filed their individual tax returns prior to this date may have missed or miscalculated their deductions. Many tax return software providers added disclaimers that the guidance was not finalized. Even after guidance was issued, off the shelf tax preparation experienced errors in computing the deduction. In a final blow, a few small business owners were excluded from the deduction due to income limits or their type of business. Proper planning prior to the end of 2018 may have resulted in a different outcome for those small business owners.
The 2018 tax filing season was the first time in over 30 years that such drastic changes were made to the tax code. Many small business owners were eligible for these additional deductions, especially those who worked with a trusted advisor. If after reading this article you feel that you failed, knowingly or unknowingly, to reap the benefits from the TCJA it’s not too late to turn your season of darkness into the season of light.