On December 2017, one of the biggest tax overhauls in more than three decades, the Tax Cuts and Jobs Act, was signed into law. As official filing starts next week, startups and small businesses will start to see some important changes as they prepare their documentation.
Senior tax accountant Brannon Montgomery and managing partner Brad Ebenhoeh from startup-focused accounting firm Accountfully share that the stated goal of the new code “was to put money back into your business, so you’re able to hire more people and stimulate the economy.”
Reviewing these changes with your accountant can help you think through how they might affect the next year of your business’ operations.
“When you meet with your CPA, make sure they understand the type of business you’re in, why you’re in that business as far as your goals, and if you’re aiming to keep profits to grow the business or take money out for personal cashflow purposes. It will help them guide you into the right credits,” says Ebenhoeh.
If you feel like you’re scrambling to get ready for your CPA, Ebenhoeh says startup founders should think of tax season beyond just the April 15 deadline. With new investments, additional employees and other changes, thinking about it as a year-round process can help make the entire process go more smoothly.
Montgomery and Ebenhoeh break down the changes to keep in mind as you meet with your accountant and how they could benefit your business.
Reduction of taxes for S-Corp and LLC companies
If your startup is currently an LLC or S-Corp, you may qualify for a 20 percent deduction on net income related to your business, says Ebenhoeh. For example, if you make $100,000 of net income in your business, you can deduct 20 percent and only pay taxes on the remaining 80 percent, in this case, $80,000.
“It’s a quick and easy tax savings from a net income deduction, specifically beneficial for contractors, startup founders, and freelancers due to the way their tax entities are set up,” he says. Note that businesses where the employees are the main asset — for example consulting, health, law or financial services — may not qualify for this deduction.
It’s not all fun and games — no more entertainment deduction
Before the new tax act went into effect, entertainment expenses such as taking a client out for a show while they’re in town, allowed for a 50 percent deduction. No more — the entertainment deduction has been eliminated. However, meals while conducting business are still considered 50 percent deductible.
Another thing to keep in mind — meals provided on premises, say your startup provides lunch for your employees once a week, are now 50 percent deductible, down from the original 100 percent.
Depreciation of equipment
Previously, you had to depreciate the cost of equipment used by your company — from delivery vehicles and servers to laptops, phones, and even furniture — over the equipment’s life. You can now fully deduct up to $1 million in equipment costs from the year it was purchased. While this bonus depreciation is only available until 2022, you can receive significant tax savings between now and then.
This can be especially helpful for growing companies that are moving into bigger spaces and purchasing furniture, desktops, laptops and more all at once.
Don’t forget about the R&D tax credit
Ebenhoeh reminds startup founders that the research and development tax credit is “very applicable for a lot of tech startups developing new software and applications while spending a long time researching processes.” The R&D credit is a federal tax incentive meant to stimulate innovation, technical design, and manufacturing in the U.S.
“You’re able to offset qualified expenses, essentially wages paid or services performed by employees or contractors. If there’s a developer that spends 100 percent of his time developing a new app, his wages would be an R&D expense. You can also expense any supplies used to conduct research and development,” says Ebenhoeh.