New details have emerged from the IRS that explain how small business owners may be able to obtain different tax breaks.
This article discusses the different rules the IRS has proposed, and what this means for small business owners in the United States.
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Some experts are predicting that the recent tax legislation will create a ton of new business creation and activity—just not the kind that lawmakers originally intended. These people are predicting a surge in efforts for reclassification and the organization of cover companies by employees so they can have their salaries recognized as business income, significantly lowering their tax burden as a result.
A central tenet of the Republican bill is that it reduces both corporate and pass-through business tax rates. Corporate profits are now taxed at only 21 percent, and owners of pass-through companies will get to take a 20 percent deduction. While these same experts predict it will take some time to adapt, they believe that as lawyers and accountants delve into the new rules, they will find ways to minimize taxes for their clients using the new tax structure.
A group of tax law professors and lawyers wrote a paper on various ways imaginative and wealthy individuals can use the preferential business tax treatment to reduce their taxes. This academic paper is entitled “The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the New Legislation” (available for download via SSRN), and it chronicles how they believe individuals in various fields and scenarios will create or turn themselves into small businesses to take advantage of the new tax structure.
Below is a brief synopsis of the different strategies. As always, remember that each situation is unique and you should consult your tax professional before implementing any of these strategies—this is definitely not a DIY type of situation.
Partnership Game Changers
Some of the paper’s authors believe that people will transform themselves into self-employed contractors or partnerships, thus turning their wages into pass-through profits and entitling them to the 20 percent deduction.
The IRS lays out pretty strict guidelines on who can be classified as an independent contractor, with a bias toward workers being treated as W-2 employees—so this isn’t a simple path. The most likely candidates are individuals in certain professions, such as law firms. One example given is that associates (partners would already receive the pass-through treatment) could create an LLC and then be hired by the firm. There are provisions that prevent guaranteed payments from qualifying for the deduction; however, many feel these regulations are weakly written and might only apply to S corporations.
Split the Difference
Another strategy professional service pass-throughs can use is to split their companies into parts. One part would perform the services portion of the business, while the other would own the real estate and/or any productized revenue streams. Separating the service portion of the business would allow the other segments to qualify for profit deductions where they would not otherwise if they were comingled.
Self-Incorporation
Initially, many believed the easiest way to arbitrage the new tax rate structure would be to organize a corporation. 
Currently, however, most entrepreneurs avoid forming corporations due to double taxation (profits are taxed at both the corporate level and then again as dividend distributions). The reduced corporate rate of 21 percent combined with the top dividend rate of 20 percent means that even taxpayers in the top brackets will do better not incorporating; however, opportunities for interest earning investments are still available.
Conclusion
Change often means opportunity when it comes to tax law. The new tax law substantially shakes up business taxation, and as professionals sort through the finer details, new strategies will emerge for some taxpayers.
What does your tax return say about your financial situation? The fact is, the paperwork you file each year offers excellent information about how you are managing your money—and about areas where it might be wise to make changes in your financial habits. If you have questions about your financial situation, remember that we can help. Our firm is made up of highly qualified and educated professionals who work with clients like you all year long, serving as trusted business advisors.
 So whether you are concerned about budgeting; saving for college, retirement or another goal; understanding your investments; cutting your tax bite; starting a business; or managing your debt, you can turn to us for objective answers to all your tax and financial questions.
It’s not unusual for taxpayers to be surprised—and perhaps more than a little confused—by some of the correspondence that is received from the IRS. Here’s a case in point: Many taxpayers have been puzzled by notices they have received related to 1099 forms. For example, problems have arisen in the past surrounding notices related to Forms 1099-K (Payment Card and Third Party Network Transactions) and 1099-C (Cancellation of Debt). Those who received the notices were frequently uncertain what they meant and how they were expected to respond.
If you have received one of these notices—or any other letter—from the IRS, be sure to contact us. The Service may simply need more information, have additional tax liability or are due a refund. No matter what the situation, we can help you understand the problem and work with you to resolve it.
Are you ready for tax time? There are a couple of steps you can take now to alleviate some of the stress of filing your return. Plan to get organized early. Begin by putting together a tax folder with W-2s from your employer, 1099s for other income you may have earned, bank and other financial statements and receipts for things like medical bills and charitable donations.
Once you’ve gathered all your important paperwork, this is a good time to meet with your CPA to talk about changes in your financial situation or in tax laws that may have an effect on your return.  Having this discussion early is key to avoiding surprises at tax time and a great time to get started on planning that can potentially minimize your tax bite and strengthen your financial situation. Call us today!
There’s good news for taxpayers: A number of popular tax provisions that expired at the end of 2013 have been extended into 2014, thanks to a new tax law passed by Congress in December. That means qualified individuals will be able to claim deductions for the state and local sales taxes and some higher education costs and exclude from income any mortgage debt cancellation for 2014. Businesses will benefit from one more year of bonus depreciation and Section 179 expensing and from a research tax credit for some qualified expenses.
These are just a few examples of the provisions extended by the Tax Increase Prevention Act of 2014. If you’d like more information, or if you’re concerned that you may miss out on some these last-minute extenders, be sure to call our office today. We can help you claim all the proper credits and deductions and offer advice on minimizing your taxes going forward. Keep in mind, too, that the yearend legislation has had no effect on the Internal Revenue Service’s schedule. As a result, we’re ready to get started today on all your tax planning needs.
