One Midlothian business is doing its diligence to make sure the public is aware and prepared to file taxes with a new law in effect that is estimated to affect 10 million business owners across America.
Annie Fairchild, a certified public accountant, and Sharon Price, a certified public accountant and audit director at AFairchild, PC, have a combined 53 years experience in the field. Fairchild explained it took over 80 hours alone to analyze just five-pages of part of the new tax law.
The hot topic revolves around the new 20 percent 199A deduction and “reasonable compensation.” If mistakes are made on a business owner’s taxes, he or she could be hit with penalties, additional interest and an understatement penalty as well, Fairchild explained.
Fairchild also noted she was told by a reliable source that the IRS hired an additional 2,300 auditors to specifically audit whether people are paying themselves reasonable compensation as required by the IRS Tax Code.
The two CPAs have comprised research and created criteria on how to determine the reasonable compensation to present to the public.
“That number [reasonable compensation] is going to become a critical piece of the tax return under the new tax law," Fairchild explained. "Before 2018, a difference in reasonable compensation paid did not impact taxable income, but now with the new law and the new 199A deduction, it does impact taxable income.”
“The new tax law has made some things easier and others a little vaguer and more complicated,” Price said.
What Price is referring to is the new 199A qualified business income deduction. According to the 180 pages of clarification provided by the IRS, it is estimated that the total annual reporting burden will be 25 million hours. The estimated average burden hours per respondent will vary between 20 minutes to 20 hours with an average of 2.5 hours. The estimated number of people impacted by the 199A is 10 million people. “So, it’s a big deal,” Fairchild expressed.
“Again, we are talking about businesses, all businesses,” Price stressed. "From the person who is mowing your grass to the person who owns a little store from the person who has a service business, plumbing that sort of thing even to larger manufacturers and those in construction.”
For instance, if a person is single or married filing jointly, and their taxable income is lower than $157,500 (S) or $315,00 (MFJ), and he or she has a schedule C business, partnership or an S corporation, that person will receive a 20 percent deduction on qualified business income.
Fairchild gave an example, “Let’s say you have a schedule C business and make $100,000 — the bottom line — you’re going to get a $20,000 dedication just given to you because of the new tax law. That’s huge because if that person is in a 25 percent tax bracket, well 25 percent of $20,000 is $5,000. So your income tax just dropped by $5,000 because of this dedication.”
Businesses who qualify are sole proprietors, schedule C or E, LLC (taxed in any matter except as a C corporation), partnership, S Corporation. Other incomes that qualify are cooperative dividends, REIT Dividends, and publicly traded partnership income.
Another significant change under the same tax law is that all businesses with $25 million or less in gross revenue can use the cash method of accounting, whereas before all businesses with $5 million or more in gross revenue were required to use the accrual method of accounting.
Under the accrual method of accounting, businesses have to pay taxes on money that is not collected from other businesses or individuals.
There are ways to prepare for the tax season and AFairchild, PC is hosting an educational luncheon to overview the new tax law. Specifically, it will answer the questions: Can I qualify for a new 20 percent deduction (199A)? How can I determine my reasonable salary? Can I qualify for the cash method for tax reporting? Is it beneficial for my business to be a C corporation?
The free seminar will be from 11:30 a.m.—1p.m on Sept. 20 at the Midlothian Conference Center, located at 1 Community Drive. To RSVP, email Emily@afairchildpc.com or call 214-731-7664. For updates, like AFairchild, PC on Facebook at @afairchildpca and follow it on Twitter at @AFairchildPC.
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Ashley Ford | @aford_news | 469-517-1450