By Michael Bradley
Special to Delaware Business Times
This is the time of year when Ron Myers is helping the various companies under the Eastern States Group umbrella prepare their 2017 income tax returns.
“It’s not like we’re looking for something to do,” the CFO said.
Thanks to work done at the end of last year by Congress and President Trump, Myers and small business execs across Delaware have some more work than they had anticipated even a few months ago. The new tax law, which was designed to simplify filing for individuals, has created a need for businesses to create new strategies and procedures to prepare for 2018 and beyond.
The Eastern States Group is a family-owned business started in the 1950s that contains construction, home building, real estate development, leasing and self-storage components. Now moving into its third generation of leadership, Eastern States must take a look at how it has set up its various arms and adjust to the vagaries of the new law. Myers estimates that some of the work will occur in 2018, but since the year has already started, not everything will be in place until 2019.
“We’ll spend some time to get through understanding what it all means to us,” Myers said. “With the tax code, if you miss a word, it can be trouble.”
“We don’t have a plan yet. We’re trying to come up with one, but it’s going to take some time. They sprung it on us at the 11th hour.”
Myers isn’t alone. Across Delaware and the country, small businesses are working with their accountants and financial consultants to craft plans of attack for the coming years in response to the new law. Like Eastern States, they will need some time to figure things out, because the rules changes could lead to some reconfiguring and even reclassification.
“I think the goal when they started this was simplification, and they may have accomplished that some on the individual side,” said Brian Stratton, tax director at Wilmington-based Horty & Horty. “They didn’t do that on the business side. There are a lot of things that weren’t there before, but we don’t yet have the regulations from the IRS that will provide the details of how to apply certain things. “There are a lot of questions.”
According to Jim Selsor, a partner at Gunnip & Co., a CPA firm in Wilmington, one of the main changes from a business side has to do with the various deductions small firms can take. The smaller concerns, whose incomes “pass through” from the business to the individual – such as sole proprietorships, partnerships and S Corporations – are able to deduct 20 percent of their net earnings, if their married joint filing (MJF) taxable income is less than $315,000. Single taxpayers can’t have incomes above $157,500.
For specified trades or businesses, such as doctors, attorneys, financial advisors and accountants, whose MJF is between $315,000 and $415,000 (or $157,000 and $207,500 for single filers), the deduction is phased out. These service businesses are not eligible for this deduction if their MJF taxable income exceeds $415,000 ($207,500 for singles). Wage earners are not eligible for this deduction. Only pass-through businesses in these service sectors may apply.
“It’s simple for businesses under $315,000,” Selsor said. “For those up to $415,000 and above, it’s more complicated.”
For some businesses classified as “C Corporations,” the annual tax rate will rise from 15 percent to 21 percent, creating a potential decision about whether they should reclassify themselves as partnerships or S Corps, according to Stratton.
There are other areas addressed by the new law that could cause businesses to make some changes. For instance, the amount of medical expenses eligible for deduction has increased. The child-care credit has been expanded. And there is an expanded increased alternate minimum tax.
That’s the good news. The bad news is that the deduction for state, local and real estate taxes is limited to $10,000. And miscellaneous itemized deductions, such as tax preparation and home offices, have been eliminated. Also gone are credits for client entertainment, such as sports tickets. Businesses were allowed to deduct 50 percent of that tab. Now, only dining applies. And, no, taking a prospect to a ballgame and having a hot dog while there doesn’t qualify. “Some businesses are going to have to rethink how they entertain,” Stratton said.
In the end, every small business must rethink its status in regard to the tax code. Once the IRS provides guidelines for how everything will work, people can start strategizing. No matter what, there is work to be done.
“It’s going to be a puzzle,” Myers said. “We have to wrap our heads around it.”