Tips for Small Businesses to Prepare for New Tax Proposals


The House Ways and Means Committee recently released new tax proposals with a variety of provisions that impact small businesses. While there have been a few estate planning or real estate investing wins over the original proposals, business owners are getting the short end of the stick with potential increases in their tax bills. How can small businesses prepare for these potential changes?

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What is on offer?

Tom Wheelwright is CPA and CEO of WealthAbility.

Let’s take a look at what changes are proposed. As it stands, when an investment in a partnership goes awry, it is considered an ordinary loss and an ordinary loss can offset any type of income. The new provision would change that to a capital loss that has an impact. Unlike ordinary losses, capital losses can only offset capital gains. Additionally, if you are a successful business owner with more than $ 400,000 in income, you may see a reduction in your earning exclusion when you sell. The proposal would reduce the earnings exclusion in section 1202 from 100% to 50%. This is not the only limitation on the horizon. The popular 20% deduction for flow-through entities, the QBID Qualifying Business Income Deduction, would be capped at $ 500,000. Currently, there are no limits on the QBID other than the limits on industries eligible for this deduction. Finally, net investment income tax would apply to passed on business income over $ 500,000 that is exempt under current tax legislation. This adds another 3.8% tax to the income tax increases.

How to prepare for big changes

Will the Tax Proposals pass as they are now? It is possible that they will change slightly, however, what remains the same is the ability to proactively plan for these major tax changes. Any smart business owner will take the time to meet with their tax advisor and lawyers to make sure they are updating their tax strategy appropriately. trimester. Tax planning is complicated and can take months to be done effectively, so the sooner you start, the better.

What strategies can be implemented?

President Biden has long said that those earning less than $ 400,000 in income will not see a tax increase, so business owners should approach their planning to reduce their taxable income to $ 400,000 or more. less. There are various ways to do this legally, including bonus depreciation on real estate and other business investments, oil and gas investments, and adding solar panels to your buildings. A well-trained tax advisor will be able to share the best methods based on your current income and business.

Remember that the tax law is a series of incentives for business owners and investors. While the new proposal may create new challenges, there are many legal tax strategies that can reduce and eliminate your taxes when implemented correctly. Now is the time to start revamping your strategy and preparing for potential tax changes.

Tom Wheelwright is CPA, CEO of WealthCapacity®, bestselling author of Tax-Free Wealth (Rich Dad Advisors Series), speaker, entrepreneur and host of 2 popular podcasts: The WealthAbility® Show with Tom Wheelwright CPA and The WealthAbility® for CPAs Show.

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