With taxes come complexity and, often, confusion. Coupled with the recent passage of the Tax Cuts and Jobs Act (TCJA), common questions are now laced with tax reform nuances. Here are four questions we are commonly asked by our clients, with a tax reform twist.
Should I be monitoring my W-2 withholding?
The answer is simple: yes. And with the new tax reform, being aware of your personal withholding allowances is even more important. While an individual’s net paycheck tends to be the focal point, there is also a large impact on the potential income tax refund or balance due.
Changes to the 2018 withholding rates will change an individual’s paycheck, meaning that some will receive a smaller refund for 2018 despite the one to three percent lower tax rate under the new tax reform law. Others may receive a larger refund but would prefer to see that money in their paychecks. It’s a good idea to revisit your W-4 to determine whether any changes are needed for your desired outcome, taking into consideration the new withholding rates as well as additional tax reform changes such as itemized deductions, the increased child tax credit, and the elimination of dependent and personal exemptions.
What type of entity is right for my business?
Choosing the right entity for a business requires careful consideration based on the particular facts and circumstances of its operations and the owners’ goals. Each entity type (sole proprietorship, C Corporation, S corporation, partnership) offers many options that should be examined to determine the most appropriate form for the business in question.
What can often be overlooked by business owners is that as facts and circumstances change, perhaps their business entity of choice should change as well. It can be assumed that once a business is formed, there’s no turning back on the entity of choice. However, the analysis conducted at the time of formation should not be abandoned – it should be revisited as the business evolves and changes.
With the passage of TCJA, additional considerations need to be included in the choice of business entity analysis. A corporate tax rate reduction to a flat 21 percent from the graduated maximum tax rate of 35 percent, the 20 percent deduction for non-corporate taxpayers, and a limitation on state and local income tax deductions are just a few of the impacts to be reviewed and discussed. Some other considerations include the owners’ distribution goals, if (and when) a sale is desirable, and the tax implications (and consequences) that may be involved in the conversion process.
What's the difference between a credit and a deduction?
While credits and deductions work the same way – reducing your taxable income, thereby reducing your tax liability – there are notable differences.
- A credit is a direct reduction to your tax bill, providing a dollar-for-dollar reduction of your income tax liability. The measured worth of a tax credit depends upon the particular tax credit in question, with each having its own qualification guidelines.
- A deduction lowers your taxable income and is equal to a percentage of your marginal tax bracket.
Does my company qualify for the R&D credit?
Taxpayers often assume that if their company is small or not involved in scientific research, the R&D credit isn’t applicable to them. The R&D tax credit was created to encourage innovation, spurring job growth and economic activity. It applies to companies in all industries that “attempt to create new or improved products or processes where the research or development activity involves the elimination of technical uncertainty.” And since there are no company size or revenue requirements, companies of all sizes may claim the R&D tax credit, if their activities qualify. As with most things in life, it’s best not to assume. An inquiry should be made to determine whether, and how, your company qualifies for this benefit. It never hurts to ask!
As tax practitioners, we receive a wide variety of questions from clients. Not surprisingly, with the recent tax reform these questions have increased in volume and complexity. Whatever your tax-related question may be, we’re here to help.
You may also like: