Now that the new year has arrived, business owners everywhere need to turn their attention to one of the less-fun aspects of running an organization: filing their taxes. While this task isn’t the most riveting, or the easiest to understand, it is a necessary one to accomplish on time.
In 2018, filing taxes may be a little bit different than past years, considering the changes made via the tax reform bill passed in late 2017. While many aspects of filing taxes will be the same, several alterations to the tax code should prompt a close evaluation by business owners, or at least a hired tax professional. It’s important to ensure business owners are making the right choices to financially benefit their companies.
Of course, while some things have changed, many have remained the same. Here are some tips for filing your taxes in 2018:
Filing taxes in 2018: What has changed
Lower corporate tax rate
One of the most significant changes implemented through the Tax Cuts and Jobs Act is the reduced corporate tax rate, which dropped from 35 to 21 percent. This puts American corporations’ tax rates at lower than the average measured by the international Organisation for Economic Co-operation and Development. Previously, the U.S. had the highest in the group, according to The White House.
The goal for this move is to encourage more Americans to use U.S. corporations, Lexology explained. Whether this will have the intended effect remains to be seen. Either way, today’s corporations will enjoy a tax break.
Tax cuts for pass-through entities
Big corporations aren’t the only businesses that will benefit under the new tax rules. All pass-through entities may see a change in how they file their taxes. Pass-through entities represent nearly all – about 95 percent – of U.S. businesses, and include:
- S corporations.
These business owners will now be able to claim up to a 20 percent deduction on qualified business income (QBI). QBI refers to qualified income, gains, deductions and losses for the business throughout the year. It does not include:
- Investment income.
- Guaranteed payments.
- Payments made to a partner in a nonpartner capacity.
- Reasonable compensation to S corporation shareholders.
- Specified service business or trade where the services exchanged related to the health, law, accounting, consulting, financial services, brokerage services, actuarial science, athletics or performing arts fields. In other words, this is any business where the main asset is the specific skill or reputation of the owner or one or more employees.
Why so many restrictions on QBI? Financial advisor and Business Insider contributor Jordan Waxman explained this is an effort to dissuade business owners from reclassifying their wages to qualify for a more favorable tax rate, or from underpaying themselves to lower the amount they owe in taxes.
The 20 percent deduction for QBI applies to either:
- Half of the taxpayer’s share of the business’s W-2 wages, or
- One-quarter of the taxpayer’s share of the business’s W-2 wages plus 2.5 percent of his or her share of the business’s unadjusted bases of depreciable property used in the business.
Whichever formula presents the greater outcome is the one used for filing taxes. It’s important to note that the business’s unadjusted bases of depreciable property does not apply to publicly traded partnerships, taxpayers who make less than $157,500, or taxpayers filing jointly who make less than $315,000.
For businesses that tend to have large amounts of capital but few employees, such as real estate initiatives or factories with a lot of machinery, the second formula will likely be more beneficial.
In addition to the 20 percent deduction for QBI, the new tax law also states that pass-through entities are allowed an additional 20 percent deduction for qualified cooperative dividends, real estate investment trust dividends or publicly traded partnership income.
Filing taxes in 2018: What’s still the same
While there may be some significant changes to how you file taxes, you’ll still need to know when everything is due. Here are the important due dates for businesses this year:
March 15, 2018
- Partnership or multiple-member LLC returns on Form 1065 with Schedule K-1.
- S corporation returns on Form 1120S.
April 17, 2018
- Sole proprietorships and single-member LLC returns on Schedule C.
- C corporation returns on Form 1120 that recognize Dec. 31 as the end of their fiscal year.
For corporations that have a fiscal year that ends on any day that’s not Dec. 31, their due date is the 15th day of the fourth month after year-end.
September 17, 2018
- Partnership, multiple-member LLC and S corporation extension deadline.
October 15, 2018
- C corporation extension deadline.
It’s important to note that getting an extension for your taxes doesn’t mean you can wait five months to pay your taxes. The extension is only for the paperwork. You’ll still have to pay your taxes by the March or April deadline (or the one that applies to your specific fiscal year end), plus you’ll need to file for an extension by the original due date, too.
How do you make a tax payment without filing your taxes? The short answer: Take your best guess at what you’ll owe. When you file your taxes, you’ll learn how far off the mark you were, and if you overpaid (which is favorable to underpaying, which incurs a monthly fee), you’ll get this back in your tax refund.
Find your receipts
This year, like in all years, having your receipts on-hand can help you claim deductions that will save your business money. If you haven’t already implemented a system for organizing all your receipts throughout the year, now’s the perfect time to do so.
Entrepreneur contributor Peter Daisyme suggested using 1tap receipts, which collects and organizes receipts for you. Simply import photos of your receipts or forward the invoices in your inbox to the app, and it’ll automatically extract line items. It’s also compatible with most tax-filing software.
Another helpful app is Shoeboxed, which also lets you scan or email receipts to the app to be organized. If you literally have a box full of receipts you need to wade through, you can mail the entire thing into Shoeboxed and the staff there will scan them and enter the data for you, The Balance reported.
Tax professionals can help
No matter how much tax law changes, there’s one undeniable fact that will always remain: Filing your taxes is complicated. This year, especially amidst changes to the tax law, businesses may find that turning to a tax professional can be incredibly helpful.
To learn how Bank Midwest can help make business finances easier on you, reach out today. We can offer business bank accounts, commercial loans, credit cards, payment and receipt solutions and more.