As the leaves are finally changing and there is a chill in the air, it hardly seems to be the time to be thinking about taxes. However, the fall brings the best time of year for businesses to review their current financial statements and consider the effect of taxes on their bottom line. As we are in year two of the most substantial tax reform in decades, here are the hot tax topics business owners should be reviewing with their tax advisers.
Qualified Business Income (QBI)
The 20% deduction for Qualified Business Income (QBI) was the biggest headline with 2018 tax returns, and brings with it many planning opportunities. Businesses should be aware of the various income thresholds dictating the availability of the deduction, and work to ensure business results support the full deduction when possible. Additionally, recent guidance has been issued on how the QBI is determined for real estate holdings, whether those are passive rental properties or real estate used in business operations. Business owners would be well served to discuss the maximization of the QBI as part of their year-end tax planning.
Out-of-State tax issues
Much of the state tax news in the past 12 months has centered around the Wayfair decision, which impacted the states' ability to assert enough of a connection ("nexus") to subject out of state sellers to sales/use tax reporting and collection responsibilities. As states continue to establish their thresholds for sales/use tax filing, many states are simultaneously changing their income tax nexus methodology in order to generate new sources of revenue. As businesses expand into new territories, working with tax advisers to understand the state tax impact to the bottom line is critical.
Illinois tax issues
The Illinois Legislature this month will consider an increase in income taxes from the current 4.95% to as much as 7.99%. Business owners of flow-through entities (S corporations or partnerships, for example) pay individual income tax on their share of net profits, which means that the proposed tax increase will affect their Illinois tax burden. The proposed tax increase is raising interest in the idea of changing residency or domicile.
It's important to consider that changing an individual's domicile will not eliminate business owners' Illinois individual income tax as the business income of an Illinois based flow-through entity or an out-of-state entity with Illinois operations will still be subject to Illinois tax. The rules related to changing domicile are complex and can affect more than just income taxes. The question should be addressed with legal and tax advisers to ensure the effects of a change in domicile are fully understood.
New expense/loss limitations
The tax act was not all good news for business owners. The new rules include limitations on the deductibility of certain interest expense and business losses. Seeing a large interest expense on your financial statement or having a large loss carry-over does not automatically mean that those will be deductible on your 2019 tax return. Preparing tax projections in the fall should eliminate surprises in the spring.
While it's not easy or pleasant to think about taxes, we believe it's important to not just think about taxes in the spring. While year-end tax planning can be effective, it is even more effective to work with your tax advisers throughout the year to understand the many tax law changes and their impact on your bottom line.
• Karen K. Snodgrass, CPA oversees Cray Kaiser's tax division, with niche expertise in closely held and family-owned businesses.