NEW YORK – Five months after massive federal tax changes became law, many small-business owners still don't know whether they'll be winners or losers.
Mike Kaeding would like to know how his real estate development and management company will be affected by two big changes – the deductibility of business meals, and a 20 percent income deduction for many owners of what are called pass-through businesses.
Big corporations already know their tax rates are falling, and all businesses can get bigger deductions for equipment purchases. But small-business owners and tax advisers are still waiting for the IRS to write regulations and guidelines explaining and enforcing many parts of the law that is itself more than 500 pages long.
“We have a high level of uncertainty and that makes it difficult,” says Kaeding, president of Norhart in Forest Lake, Minnesota.
The American Institute of Certified Public Accountants, a professional group, has asked the IRS to expedite regulations on business meals and the 20 percent deduction. Ken Rubin, a CPA with Rubin Brown in St. Louis, says clients have been asking his opinion about what is and isn't deductible.
“These are unclear, significant items that small businesses are worried about,” says Rubin, who is also a member of the AICPA's tax executive committee.
Small corporations structured like General Motors or Apple know they'll have a 21 percent tax rate, compared with a previous range of 15 percent to 35 percent – the same change the big companies are getting.
And many small manufacturers and construction companies will be able to use what's known as the cash basis method of accounting, a much simpler system than the method required before.
But a survey of 603 owners taken in early April by Wells Fargo and Gallup showed many owners were still in the dark.
Thirty-nine percent said they don't know how the law will affect their companies. A third said it had already helped their companies or would do so, and 27 percent didn't expect it to benefit their businesses.
For owners of pass-through businesses – sole proprietors, partners and owners of companies structured as S corporations – the uncertainty around the 20 percent deduction comes from the list of ways they could be disqualified. For these companies, the business income is “passed through” to the owners' 1040 forms, and they pay tax based on individual rather than corporate rates.
Certain business owners like lawyers, accountants, doctors and consultants won't qualify for the full deduction unless their taxable income is below $157,500 for single filers or $315,000 for joint filers, and the amount of the deduction will decline as taxpayers' incomes rise.
The same goes for business coaches, public speakers, therapists – according to the law, any trade or business whose principal asset “is the reputation or skill of one or more of its employees.”
But the IRS has yet to weigh in on a number of issues, including the calculations businesses must make to determine the income that can qualify for the deduction.
Some owners know they will get the deduction and plan to make the most of it, including Larry Patterson, who owns a Glass Doctor repair franchise in Carrollton, Texas.
“I have more money to invest in growth,” he says. He plans to expand his company's premises and do some hiring.
But Ted Ma, who has two businesses, one as a public speaker and the other in sales, says he's in limbo.
“The lack of clear information available to determine exactly what applies to my situation has been both confusing and frustrating,” says Ma, who lives in Point Richmond, California.
He's not sure as he makes quarterly estimated tax payments whether he's overpaying or underpaying. He also wonders as he takes prospective clients and customers out for meals whether he'll be able to deduct them.
“The meal is a major part of how I do business,” he says. “That's another source of frustration and confusion.”
The uncertainty as the IRS writes the regulations could last into 2019 and beyond. “Regulation projects can range from months to years – if ever finalized. And each project takes a different amount of time,” says Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.
Many accountants have started making educated guesses. CPA Angela Dotson expects most small businesses to pay less in taxes. Owners who have multiple businesses will have more uncertainty, but “the bread-and-butter companies that hire most people, they're not going to have the most issues,” says Dotson, who's with the accounting firm Aprio in Atlanta.
But smaller corporations aren't guaranteed a windfall. David Arena's real estate photography and marketing company had a profit last year low enough to give Alcove Media a tax rate of 15 percent. He's expecting a 6 percentage point jump this year.
“I would have liked to maybe see a tiered (corporate tax) system again,” says Arena, whose company is based in Bala Cynwyd, Pennsylvania.
Owners who are uncertain or who know they're not likely to get a break can take steps to lower their tax bill, says Loreen Gilbert, owner of WealthWise Financial Services, an advisory firm based in Irvine, California. Gilbert points to herself as an example: She doesn't expect to get the 20 percent deduction, so she's putting more money in her retirement account.
Business owners should also meet as soon as possible with accountants to get a sense of how they could be affected, says Monic Ramirez, a CPA with Sensiba San Filippo in Morgan Hill, California.
“So much has changed in the new law. You need to sit down with your tax preparer and see what parts of this are going to benefit your company and how can you position yourself to take advantage of it,” she says.
Kaeding, though, is concerned about the cost of complying with the law – he expects a higher bill from his accountant. And the confusion is a distraction from running his business.
“All the time we spend understanding the tax system does not help our customers,” Kaeding says.