With the announcement of the 20 percent income tax break, many small businesses in Seattle are changing their tactics quickly to qualify for it. They go to their accountants who suggest potentially risky ideas that coincide with the new law and could be beneficial in saving the company money.
However, the IRS recently proposed laws on these deductions to limit what some business owners are able to do to qualify for the tax break. Before you consult with your accountant on ways you can take advantage of this new law, you should be aware of how you could lose your eligibility for it.
Having too high of an income
The main requirement that small businesses owners need to qualify for the 20 percent deduction is that their taxable income must be below $157,500 or $315,000 if it is a joint account. This means attorneys, accountants, doctors and other careers with higher income will likely not be able to take advantage of this.
However, if it is just barely above the borderline, small business owners can still legally reduce taxable income by directing some of it to their retirement account or charity of choice. This can only be done if you itemize it and it meets the deduction requirements.
Changing from an employee to contractor
Some employees have tried to get the new deduction by quitting their old jobs and rejoining as contractors. If they do this, they can start a new business without losing too much from their old position and qualify for the tax break in the process.
The IRS’ proposal forbids employees from doing this unless the contractor proves that their services are not the same as an employee. If you were to start a new business on the side, you still need to pay the standard taxes for it without that deductible on the side making your job easier.
Separating into two entities
One of the more popular strategies to deduct taxable income is the “crack and pack” tactic. This means that if a company has too high of an income, they split into two separate businesses and would qualify because each side’s income is now below the threshold.
With the proposal, the two companies cannot qualify for the tax break if the IRS finds that they are related. Any business that has attempted it now must go through a tedious process to merge back into a single entity.
Small business owners should review the IRS’ policies on the tax deduction before discussing potential tactics with an accountant or attorney. If you are too rash in getting your company to meet the conditions, you might suffer long-term financial consequences.