What is tax reform and how will it affect you and your business?
If you have been watching tv and radio you may have heard a lot of different things about tax reform, which is both confusing, and some of it incorrect.. So, let’s instead try to focus on what the tax reform will mean to notaries and their businesses.
** Disclaimer: Just to make clear, we are not tax professionals, we are notaries at heart that run an online and mobile notary service. The goal of this article is to inform you on some things upcoming, and to give you ideas for questions you may want to ask your tax professional. So please proceed understanding this is not tax advice, this is for informational use only.**
The Corporate Tax Rate was Cut, How Does that Affect My Business?
A big part of tax reform was cutting the corporate tax rate from 35% to 21%. And you’ve seen companies racing for tv time giving out Christmas bonuses and pay raises. (Not to detract from their actions, but free publicity is the best publicity)
But does this affect the average notary?
The first thing you must take into account is that there is more than one way to skin a cat, and even more ways to structure a business. And how your business is structured will have an effect on what tax reform means to you personally.
Most mobile notaries that we do business with are set up as sole proprietors or as a single member LLC.
In most cases, the sole proprietor carries income almost exactly like a sub-contractor or a freelancer. You have to save extra payroll taxes to pay at the end of the year (depending on income, some sole proprietors are required to pay quarterly). Here is what CBS has said about that income.
Gig economy workers like Uber drivers and freelancers will benefit under the tax plan’s treatment of pass-through income. The tax bill provides a 20 percent deduction to pass-through businesses, many of which are small businesses like landscapers and Uber drivers.
Under previous law, that income was taxed at the personal income rate. But with Republicans lowering the corporate tax rate to 21 percent, that left a big gap between what big businesses would pay versus independent contractors or small business, given the top individual tax bracket will be 37 percent.
LLCs are a more complicated beast, because there are so many ways to set up an LLC. But, single member LLCs are also pass through entities, so any breaks that those entities receive, will also pass on to single member LLCs.
** Again, this is an area you will want to scrutinize with your tax professional, simply because there are so many ways to set up your business, and small differences between them may affect your final tax bill. **
Of note, we focus on being mobile notaries, not tax professionals. But, there may be ways that you can restructure your business to provide further tax relief, or at the very least simplify the process by which you have to do your accounting and pay taxes.
For example, did you know that if you are set up as an LLC, you can actually operate yourself as a larger company? Why might that be a good thing for you?
If you did this, you could pay yourself through payroll like at a normal employer. The benefit of this is that all of the payroll taxes you pay the business foots through your payroll is now tax deductible (Yay!). It also allows you to offer yourself a SIMPLE IRA, of which the business matches, which is also tax deductible for the business.
On top of that, there is a tax credit for businesses that offer SIMPLE IRAs that lasts for three tax years. We have been able to find no information that that tax credit has been removed under the new tax bill.
We talk a lot about how to be a notary and the rules and regulations surrounding it, but we plan to write some articles in the future that will show you some different ways to set up your business, plus some of the positives and negatives of those setups.
I Heard There are Changes to Business Deductions
The biggest change in business deductions likely to affect the mobile notary is that home offices will no longer be deductible. Most mobile notaries we deal with have a home office, so this is likely to affect a lot of us. (This ended up not being true. though a simplified method was added.)
To give a quick explanation and to keep numbers simple, let’s say I have a 1,000 square foot house, of which I have a 100 square foot office, or 10% of the total area of the home. Under the current bill, I can deduct 10% of things like my mortgage, utilities and capital improvements to the home. (Up to a certain percentage of my Adjusted Gross Income)
As of 2018, those deductions will go away.
I can’t argue the fact that that does not sound good. But, it is important to note that the standard deduction doubles under tax reform, and for most of us, that will more than offset any deductions we make for our home office.
Currently, employee business expenses, including the home-office deduction for employees who work out of their own homes, are deductible as miscellaneous itemized deductions, but these deductions are limited to those expenses that exceed 2% of AGI. Under the Trump plan, this deduction would be eliminated.
Weinlander Fitzhugh CPAs
The second major change in deductions is the entertainment deduction. You may not even use this in your business.
This deduction is mainly for people who take clients on outings like golf trips or sporting events. Those will no longer be tax deductible. The more likely deduction that a mobile notary might take, meals, is not affected by the change.
So, in short, business related lunch or dinner are still the same. But, taking a client and family to Disney World, you are going to have to cough up the taxes for that one.
The act disallows a deduction for an activity generally considered to be entertainment, amusement, or recreation. Under the act, taxpayers are still generally able to deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel).
– Journal of Accountancy
As accountants continue to pour through the almost 500 page bill and really nail down the changes important to you, we will do our best to keep you updated.
Also, if you’d like to read more about the bill here is an excellent article by The Hill, A Gift for the Self Employed
** Disclaimer: Once again, we want to remind you that we are notaries at heart, who also happen to operate an online and mobile notary service. We are not tax professionals. The goal of this article is to inform you on some things upcoming, and to give you ideas for questions you may want to ask your tax professional. So please treat this as informational use only **
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