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How Tax Reform Impacts Small Business: What are the Pros Saying?

by
TaxBuzz Staff
on
3/6/2018
How Tax Reform Impacts Small Business: What are the Pros Saying?

Tax Reform has brought about many changes. One of the most important and noteworthy change is how it impacts small businesses. Do these tax changes benefit small business owners? What are the disadvantages? Many are still unaware and unclear as to how this bill is helpful and/or harmful to their small business. Today we're chatting with industry leaders, tax experts and small business owners to see what their thoughts are on how tax reform impacts small businesses.

• The loss of deductions for entertainment will correct years of prevalent abuses. However, what occupations or circumstances can you think of where the loss of this deduction will have substantial impact on the business or profession?

• It appears the demise of the entertainment deduction also appears to apply to business meal expenses. TCJA is unclear, what is your take on that issue?

• The restriction on entertainment expenses can substantially increase self-employment tax for the self-employed and the FICA for certain employees who have historically high entertainment expenses. What professions do you see being impacted?

• The Sec 199A deduction and the ability to deduct employee business expense will tempt some workers to call themselves independent contractors. Have you encountered any possible strategies?

• TCJA substantially increased the allowable Sec 179 deduction. But with it's recapture provisions why would one use the Sec 179 expensing when we have 100% bonus depreciation through 2022?

• TCJA limited Sec 1031 provisions to real property not held for sale. Where do you see that making an impact?

These are just a few of the questions the pros discussed and debated in today's very active live Twitter chat session.

We know how busy everyone is, so thank you to everyone who took the time to participate! Be sure to check out the highlights of the chat below. We covered a lot today!

@TaxBuzzOnline will be hosting a #TaxBuzzChat on Twitter the first Wednesday of every month at 10am PT/1pm ET. Our next chat will be Wednesday, April 4th. Don't miss out on the next hot topic! Tweet us if there are topics that you'd like to chat about or have questions about.

Let's get started! Q1. The loss of deductions for #entertainment will correct years of prevalent abuses. However, what occupations or circumstances can you think of where the loss of this deduction will have substantial impact on the #business or profession? #TaxBuzzChat pic.twitter.com/aRHuGzpsVc

A1. Waiting upon regulations, #IRS will cease the opportunity to question everything that remotely resembles "entertainment". Bottled water for a client - deductible, but if Perrier - the bubbles may appear to be "entertaining" and non-deductible... #taxbuzzchat https://t.co/Ogqg3OeGwV

A1 (cont) The "do it yourself #bookkeepers" are accustomed to categories of "meals and entertainment" tying the two together. Retraining on all categories will be essential. #taxbuzzchat https://t.co/Ogqg3OeGwV

A1: I think everyone in sales or business development is going to struggle with the loss of entertainment deductions under #TaxReform. #TaxBuzzChat

Oh yes, retraining the bookkeepers, but also the employees submitting the expenses so that you gather more details about the business purpose.#TaxBuzzChat

have to ensure folks are diligent in record keeping. So often, as the old #tax category described it, meals AND entertainment were intertwined. #TaxBuzzChat https://t.co/EjmhqzUtI1

A1 Based on upon my experience, pharmaceutical companies HAD a large entertainment budget for Sales Reps; other industries, such as insurance brokerage "Team Build" which requires an entertainment budget. #TaxBuzzChat

#TaxBuzzChat A1 - Industries I see as affected: Entertainment, outside sales, customer training, long-haul truckers - and don't forget union members with large fees

agree this area has been, uh, fudged a lot, but the ordinary for your business determination will hurt more than some expect it to #TaxBuzzChat https://t.co/WiHOpzZaIA

Q2. It appears the demise of the entertainment deduction also appears to apply to business meal expenses. #TCJA is unclear, what is your take on that issue? #TaxCutsandJobsAct#taxbuzzchat pic.twitter.com/fbTJsiVtKG

A2. Business purpose meals continue to be 50% deductible. Much commentary has been written regarding IRC 274 but it appears this is not the intent of Congress. Continued records as to client, date, place, time and business purpose is unchanged.#TaxBuzzChat

A2. #Entertainment is to sales as fertilizer is to a farmer. Does any businessperson entertain just for a write off? So fertilizer and entertainment will continue to be used. Profit motive may become more real. Conclusion - little overall effect. #TaxBuzzChat

A2. Reg. Sec. 1.274-2(b) defines entertainment, and Reg. Sec. 1.274-2(b)(ii) includes a subjective test. Neither one of them provide a bright line answer to the question, so we will have to wait for some IRS regulations on the issue, hopefully permissive. #TaxBuzzChat https://t.co/SZooYG0WT7

Q2. Although guidance is definitely needed, I think it will come down that meals will still be deductible at 50%.#TCJA #Taxbuzzchat

A2 - I've seen conflicting arguments as to whether business meals will be deductible. I think the meal portion could still be deductible but I could see the IRS challenge it without clarification from Congress. #TaxBuzzChat

#TaxBuzzChat A2. Business meals are still deductible. But I believe that meals, not directly related to business will not be deductible. Logs will be very important.

#TaxBuzzChat A2. Business meals are still deductible. But I believe that meals, not directly related to business will not be deductible. Logs will be very important.

Q3. The restriction on entertainment expenses can substantially increase self-employment #tax for the self-employed & the FICA for certain employees who have historically high entertainment expenses. What professions do you see being impacted? #taxbuzzchat pic.twitter.com/Ss97wDALqx

A3. Outside & commission sales will pay more tax that must be passed on &/or absorbed. Employees not on "work travel" will see an increase in #FICA withheld from pay so compensation will have to be adjusted as dictated by the market. #taxbuzzchat https://t.co/BfcjTV5Eku

A3. Renegotiation of contracts to cover some of these costs will be the big move for 2018

We may see these W-2 employees renegotiate to be contractors filing Schedule C as a self-employed individual to be able to claim any expenses. #taxbuzzchat

A3. (cont) Then we are faced with Section 530 issues - so much for compliant #taxpayers #taxbuzzchat

A3. If the employer does not absorb the entertainment expenses, the employee will be stuck with additional wages and FICA #Taxes and the employer will have increased payroll taxes. Either way the government collects more taxes. #taxbuzzchat

A3. (cont) Although they don't have entertainment expenses, with the demise of the employee business expenses, it appears members of the clergy may not be able to reduce their self-employment income by expenses in order to reduce their SE tax. #taxbuzzchat

Time for them to work out an accountable reimbursement plan with their employer, #taxbuzzchat

I'm assuming the sales department for a lot of different companies will get impacted, along with different self-employed consultants, etc. #taxbuzzchat

A3 #TaxBuzzChat The restriction on entertainment expenses really affects the small businesses, who market through relationships, rather than media. This seems to be a boon for big business, and a job-killer for entrepreneurs.

#TaxBuzzChat Q3 - the loss of the entertainment deduction will actually impact major corporations who buy out arenas at conventions. Small businesses? Mostly high flyers living really well. All industries

A3. the deduction for meals while on business travel remained untouched by #TCJA so seems if you travel with your employment you're better off. #taxbuzzchat

Q4. The Sec 199A deduction and the ability to deduct employee business expense will tempt some workers to call themselves independent contractors. Have you encountered any possible strategies? #taxbuzzchat #taxreform pic.twitter.com/I1GvltO6QB

A4. Some employers wanting to push independent contractor status for their workers are requiring them to establish an LLC before they will engage them. But that is only a smoke screen; it still boils down to direction and control. #taxbuzzchat https://t.co/RwKWilEGAp

A4 - unfortunately, if you were an employee before #TaxReform, you probably still are and can't be considered contract. The rules are still the same for contract workers. #TaxBuzzChat

A4. #TCJA encourages Self-Employment rather than W-2 employment. Not one #tax professional was brought in to DC to discuss these job changes. W-2 employees are the most compliant of taxpayers and the new law is counter-intuitive to compliance.#TaxBuzzChat

A4. Being an independent contractor (IC) depends on facts and circumstances surrounding the engagement... It is not automatic... Generally, where there is control there is an employee relationship. #taxbuzzchat

Q4: I'm hoping people don't go crazy with this one. The rules for employee/independent contractor haven't changed, so a business still needs to classify employees correctly. #TaxBuzzChat

A4. An employment arrangement is about more than the taxes, taxpayers shouldn't loose sight of other important items like benefit plans, employee rights and insurance coverage. #Taxbuzzchat

Q6. #TCJA substantially increased the allowable Sec 179 deduction. But with it's recapture provisions why would one use the Sec 179 expensing when we have 100% bonus depreciation through 2022? #taxbuzzchat pic.twitter.com/eRhokDcytB

A6. Bonus and IRC 179 are not too different, however the greater than 50% use test on IRC 179 assets is the factor. To avoid, Bonus could be the equalizer.#TaxBuzzChat

A6 - the main reason I've found to select §179 is to selectively choose which assets are fully expensed, especially when bonusing all assets could drive you into a loss position. #TaxReform #TaxBuzzChat

Q6: #taxbuzzchat Sometimes it is about the type of property/equipment purchased. Or there might be different state implications. But for sure it is a complicated decision!

Q7. #TCJA limited Sec 1031 provisions to real property not held for sale. Where do you see that making an impact? #taxbuzzchat pic.twitter.com/Ps5KGkv9HD

A7. Takes away the option to trade in a business vehicle to avoid gain or sell when they can benefit from a loss. All dispositions going forward will result in a taxable event. #taxbuzzchat

A7. On IRC 1031 being limited to real property not otherwise for sale, on the surface appears to not be an issue, however taxpayers make "like same trades" most frequently on equipment, particularly #farmers.#taxbuzzchat

A7. Very few #1031exchanges involve personal property. Motor vehicles are the most frequently traded items of personal property... What I expect will happen is that the negotiations on value of the property traded so that the issue all but goes away. #TaxBuzzChat

For small businesses, most of my clients prefer this change rather than keeping track of the 1031 assets in their tax depreciation schedules.#TaxBuzzChat

This is one piece of #TaxReform that produced simplification.#TaxBuzzChat

A7. #TaxBuzzChat Here in Oklahoma (and probably in Texas) Oil Rigs are large, expensive pieces of personal property. I know a rig fabricator whose customers often use(d) §1031 for trades of old, fully depreciated rigs.

thanks to all the smart #tax and #business folks who taught me a lot in this TCJA #TaxBuzzChat and reminded me why I don't focus on biz taxes! See all y'all in April! https://t.co/TFK3siptUc

Thanks for hosting, and preparing the thought-provoking questions. #TaxBuzzChat

Thank you for hosting and for asking us good thought provoking questions. I/WE appreciate you. It is also nice to spend time with others that enjoy tax- not all clients do. (Smile). #TaxBuzzChat

— Deborah Fox, CPA (@DebFoxFinancial) March 7, 2018

To see the full chat session, click here.

We had a great time chatting with our participants on such a hot topic. Feel free to use our #TaxBuzzChat hashtag or tweet us at @taxbuzzonline if you have any additional questions you'd like answered.

We'll be hosting #TaxBuzzChat the first Wednesday of every month at 10am PT/12pm ET for our monthly discussion on all things tax and accounting. Hope you can join us in April!

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TaxBuzz Staff

TaxBuzz Staff

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