As the dust settles on the tax reform bill signed into law on December 22, 2017, there are a number of new provisions small business owners need to incorporate into their 2018 tax planning. A few deductions have been removed and new ones added.

One of those shiny new items is the 20% deduction of qualified business income (QBI). This deduction is aimed at giving business owners an incentive to hire new workers. Who can deduct how much depends on the type of business you have, the assets in the business, your business income, your total income and the wages you pay. You might have guessed that the formula for this is quite complex. Which politician was touting you could file your taxes on a postcard?

The 20% QBI deduction only applies to passthrough entities such as proprietorships, partnerships and S corporations. For owners of passthrough personal service companies, including accountants, attorneys, financial advisors, realtors and medical services to name a few, this deduction applies if your total income is less than $315,000, assuming you file jointly with a spouse. All other filers are capped at $157,500 of total income. If you exceed those thresholds as a personal service business owner your 20% QBI deduction is zero.

If your business is not a personal service entity, the principal limits (there are other details, of course) on the QBI deduction are 20% of your passthrough income or 50% of your payroll. For example, take a manufacturing company with $3 million in revenue, $2.3 million in expenses and an owner’s salary of $200,000, net income of $500,000. Let’s consider they paid $800,000 in payroll expenses, the deduction is 20% of $500,000 and limited to 50% of total payroll, in this case the deduction would be $100,000 and no greater than $400,000.

C corporations will benefit from the corporate income tax rate reduction to a flat 21%, down from a high of 35%, or up from a low of 15% if profit was less than $50,000. Many large corporations have already started giving out bonuses to employees as a way of passing on the tax savings. With all the good news there were a few deductions that have been eliminated with the passage.

Business will no longer have the domestic production deduction, so manufacturers will feel the most pain with this change. In addition, the Act limits the amount of prior year Net Operating Losses (NOLs) that companies can deduct in a single year. In 2018 and beyond, the NOL deduction can be no more than 80% of taxable income and new NOLs cannot be carried back at all, compared with the prior law two-year carryback. While the carryback rule has been removed, companies can carry the loss forward indefinitely.

These are just a few of the changes and we are learning more and more details each day. Many of the regulations in this Act have not yet been written. It will be imperative for business owners to work closely with their tax teams and plan how best to take advantage of the new law to help their businesses prosper.

Lehigh Valley Business feature Lists & Leads:
Behind the List with Kristofer M. DePaolo of Werner & Co. CPAs

(republished with permission, Lehigh Valley Business)

Owning and operating a successful business is no easy feat.

Managing operating costs, retaining good employees and many other factors are vital to success. And with all of the dollars flowing in and out daily and with the importance of long-term financial planning, it’s imperative to have an accountant.

Throughout the Greater Lehigh Valley, there are accounting and tax preparation firms equipped with the resources to help your business thrive.

One firm that has a significant presence in the region is Werner & Co. CPAs in Lower Macungie Township.

Here to answer this week’s “Behind the List” questions is Kristofer M. DePaolo, CEO of the firm.

Lehigh Valley Business: How long has Werner & Co. CPAs been operating in the region and what are its primary services?

Kristofer M. DePaolo: Andrew Werner opened the practice in 1988, initially from his home office. Almost 30 years later, we have a location in downtown Wescosville on Hamilton Boulevard and another on West Broad Street in Bethlehem.

We focus primarily on tax planning and preparation for business and individual clients. We work directly with the IRS [Internal Revenue Service] on offers in compromise, installment plans, notices and resolution of a broad range of other difficulties for clients having IRS troubles.

Consulting, bookkeeping and payroll services help round out the primary boutique services we offer to our business clients with an emphasis on consulting and planning.

LVB: What have been some of the biggest challenges and opportunities that Werner & Co. CPAs has encountered throughout its years in business?

DePaolo: One challenge has been finding qualified staff. Our firm is unique in that we invite the clients to ask questions and interact with all the staff members, and we need knowledgeable, personable people to help guide our clients.

Our emphasis for staff is work/life balance, and the fact that we have flexible hours and the technology to work from anywhere helps a great deal with that balance.

In the ever-changing world of technology, the paramount issue for us is security.

Like all CPA [Certified Public Accounting] firms, we handle a tremendous amount of sensitive data for our clients and we don’t take that trust lightly. We outsource our information technology and data security to a technically forward-thinking local company that monitors and manages our network 24/7, continuously updating software, virus protection and making sure everything is sound and secure.

By embracing technology, our firm has grown, and now helps clients anywhere from Allentown to Australia.

LVB: How does Werner & Co. CPAs directly stimulate the local economy? How does it get involved with the local community?

DePaolo: I believe small businesses are the lifeblood of communities, providing employment opportunities, understanding their customers on a personal level and innovating service and delivery methods.

Our firm is also a small business, so we understand the information small businesses need to operate effectively. As we develop information for our clients’ required filings, we try always to apply that information to better manage the business and help the owners improve.

By helping our clients generate usable management information, we try give them an advantage within their own segments of the Lehigh Valley economy. We appreciate the loyalty clients give to us, and, whenever we can, we look for opportunities to reciprocate that loyalty.

Our staff all live and work here in the Lehigh Valley and look to give back in any way they can. Some of the ways we contribute are service on boards of local nonprofits, being active within the local Rotary chapters and volunteering time and energy for several causes.

For example, altogether we have dozens of years of board participation with Camelot for Children, Equi-librium, The Swain School and KidsPeace.

LVB: Does Werner & Co. CPAs provide its services solely in the Lehigh Valley, or does it expand into other markets? Who are some of its most notable clients in the region?

DePaolo: Many of our clients are here in the Lehigh Valley and surrounding counties. We do have clients in manufacturing and professional services and the retail industry operating in multiple states and/ or living across the country.

With the changes in technology, we can do business anywhere there is an internet connection.

In addition to the industries just mentioned, we serve the real estate industry, financial advisory firms, craft brewers, landscaping companies and private medical practices.

LVB: What does the future look like for Werner & Co. CPAs? Does it have plans for growth?

DePaolo: The future of our profession in whole is bright, and while there will be plenty of changes as automation grows and becomes more involved in all our lives, I don’t believe there will ever be a substitute for client interaction.

Computers can do many things to make our lives easier, but by sitting with clients and helping them with their business, we gain insight and build strong, trusting relationships. In turn, that helps us use our experience to help them avoid problems we’ve seen in the past.

For those and many other reasons, there will always be a significant human element to our practice and the accounting industry.

As for growth, we welcome that small-business owner looking to learn new things, grow their business and take some of the burden off their already overflowing plate.

Now that tax season is over, we have a new topic with a certain level of urgency. Starting 21 April 2017, and ending on 19 June 2017, the PA Department of Revenue will open a tax amnesty program. This program forgives ALL penalties and half the interest due on eligible liabilities.

Generally, any filed but unpaid liabilities as of 31 December 2015 are eligible. For most people this will be limited to Pennsylvania income taxes, but for small businesses it includes sales tax, withholding tax, capital stock tax and a host of others less well known.

Pennsylvania unemployment taxes are not eligible because they are administered by the Department of Labor. There are other notable exceptions, such as taxes for the eligible periods that have not yet been filed, but those are best sorted out through a professional.

The amnesty is actually quite broad. It applies to filed returns, non-filed returns and unregistered corporations, LLCs and partnerships that should have registered and filed but did not.

If you receive an amnesty letter from the Department of Revenue or believe you might be eligible, please act quickly because the program closes completely on 19 June 2017. After the amnesty is over all penalties and interest charges will apply, as well as a 5% penalty for not participating in the amnesty program.

Please, if you think this may apply to you, call us right away! 610-770-9236

Small-business owners are always looking for ways to minimize taxes and save money. There are various year-end tax planning strategies to help increase your deductions and identify credits that will minimize your taxes.

While tax deductions reduce your profit, tax credits are an actual credit against the total tax owed. On a personal tax level, a tax deduction would be an itemized deduction, such as mortgage interest; a tax credit would reduce your tax bill dollar for dollar, such as an education tax credit when you or your child attends college.

There are both federal and state tax credits available to businesses. Some are specific to certain industries, but many are available to all businesses.

In Pennsylvania you get an additional benefit: certain tax credits can be bought and sold to other businesses, usually at a discount of 10 percent. The research and development tax credit is available if your company spends money on qualified research. The credit for a small business is 20 percent of the increase in spending over the base period. The research must qualify under the rules for federal research and development expenses.

The Pennsylvania Keystone Innovative Zone (KIZ) tax credit is available to for-profit tech companies that are less than eight years old and are located within a KIZ. There are multiple KIZs in Pennsylvania, including South Bethlehem, East Stroudsburg University, Reading, and Bucks County. The maximum tax credit available is $100,000, and is based on a year-over-year increase in revenue from within the KIZ.

Other tax credits in Pennsylvania include the Educational Improvement Tax Credit for contributing to scholarship organizations to promote expanded educational opportunities for student (maximum $750,000 tax credit per year), and the Tax Credit for New Jobs, which is $1,000 for each new job created (increases to $2,500 if the job is filled by an unemployed individual). The company must agree to create 25 new jobs or increase the number of employees by 20 percent with an hourly wage that is 150 percent of the federal minimum wage within three years of the start date. These credits cannot be sold.

Beginning in 2017, there is a Pennsylvania tax credit available for video game production. This credit is up to 25 percent of qualified expenses in the first four years of production, and 10 percent each year thereafter. This credit can also be sold.

On the federal side, a business can obtain tax credits for providing access to your business for people with disabilities ($5,000), paying for child care for your employees (25 percent of expenses up to $150,000), starting a pension plan for your employees ($500), research and development activities, and hiring employees who are veterans, food stamp recipients, or ex-felons ($2,400 to $9,600 per hire).

There is also a credit for paying for health insurance for your employees. You must pay at least 50 percent of the premium and employ fewer than 25 full-time employees earning under $50,000 a year, on average. The health insurance must be purchased on the SHOP marketplace.

There are many opportunities for a company to reduce its tax bill. This list is certainly not all inclusive. Many tax credits involve complicated calculations, so always consult your Certified Public Accountant for more details and to get a comprehensive list of credits that may be available to you.

For the last few weeks we have been inundated with discussion of Gov. Wolf’s proposed budget legislation in the newspaper, on TV and social media. Gov. Wolf promises to rebuild the middle class in Pennsylvania with his “gimmick-free budget.” He plans to balance the state budget by cutting property taxes and increasing the sales tax and income tax rates.

Pennsylvania has not seen an income tax rate increase since 2004. Coincidentally, that was also when then Gov. Rendell proclaimed that casinos would be responsible for the largest property tax relief in Pennsylvania. Well, here we are a little over 12 years later, and property taxes in PA are back or above those 2004 levels.

We had the chance to discuss Gov. Wolf’s proposed plan with Channel 69 News Anchor Jaccii Farriss and why Pennsylvania is ranked in the top 10 for states that pay the highest taxes. You can view the TV interview here.

Here is the text of Ms. Farriss’s interview:

Tax time can really sting for folks who find themselves in the red, but when it comes down to who pays the most, you might be surprised.

Pennsylvania is in the top 10 for states that pay the highest taxes, according to a pair of new studies. According to a study done by MoneyRates.com, Pennsylvania ranked in the top 10 states with the highest per capita federal tax burden. Why? Pennsylvania has a larger population, with some of the nation’s highest earners.

In another study, Wallethub.com broke it down in terms of state taxes. The numbers stay pretty consistent with the federal figures, with one noteworthy item. Lower income Pennsylvanians pay a higher percentage of their income in taxes than other residents, nearly 12 percent, while middle income residents pay roughly 10 percent and higher income individuals pay around 9 percent.

So how does this happen? “The reason our taxes are high, I believe, is because we live in the northeast. We expect a lot from our government, and things cost more here than they do in Alabama,” said Andrew Werner, a certified public accountant with Werner and Company in Allentown.

Werner said it’s simple economics. Because lower income residents have less money, they use a bigger percentage of it for taxes.

Pennsylvania Gov. Tom Wolf is trying to ease the tax burden on residents by cutting property taxes and offering $3.8 billion in relief, but at the same time, he is proposing to raise the sales tax.

While food, clothing and prescriptions would be exempt, Kristofer DePaolo, a certified public accountant, said the higher tax could be a hardship for lower income Pennsylvanians.

“Anything of necessity that you or I would spend out money on because their income is a lower, a greater percentage is spent on that compared to a high income earner,” said DePaolo.

A spokesperson for Wolf said the governor wants to ease the blow for some residents by raising the income tax exemption from $32,000 to $36,500 for a family  of four.

In case you were wondering, Pennsylvania is one of five northeast states to make the top 10 lists for taxes paid per capita.

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