Business Advice

      The IRS recently released more details about the Qualified Business Income Deduction, a new tax regulation that will impact small business owners. In this guest post,  leading author and tax expert, Barbara Weltman shares first impressions on the regulation and potential impact for small businesses. You can find more blogs by Barbara on her blog Big Ideas for Small Business.    If you own a pass-through entity—sole proprietorship, partnership, limited liability company, or S corporation—you may be eligible for a new tax deduction. It is a significant tax reduction for business owners who qualify for it. But it isn’t simple because numerous limitations and acronyms come into play. The following is a brief introduction to the qualified business income deduction.   Overview Referred to as the Section 199A deduction (the section in the Tax Code for it), the qualified business income (QBI) deduction runs from 2018 through 2025. You don’t have to expend any capital or take any special action; if you qualify for the deduction you get it. But the bad news is that there’s new terminology and calculations for limitations on the deduction which can be daunting. The deduction does not reduce your business income and does not reduce your net earnings for self-employment tax if you’re self-employed. It does not reduce your gross income as does other business-related expenses, such as retirement plan contributions on your behalf, health insurance for yourself, and one-half of self-employment tax. The deduction comes off your adjusted gross income in the same way as the standard deduction or itemized deductions (there’s a special line for the QBI deduction on Form 1040), effectively reducing the tax rate you pay on your business profits. For example, if you are in the 32% tax bracket and qualify for the deduction without any limitations, the effective tax rate on your QBI becomes 25.6%. What is QBI? The deduction is based on the amount of your qualified business income. This is essentially your profits from a pass-through trade or business. However, QBI does not include certain items that you do factor into your net income for determining what you pay income tax on. Items excluded from QBI are: Capital gains and losses (including Section 1231 gains) Dividend income Interest income Reasonable compensation paid to S corporation owner-employees Guaranteed payments to partners for services rendered to the business What is the QBI deduction? If your taxable income is no more than $157,500 if single or $315,000 if married filing jointly, then your deduction is 20% of QBI. The deduction cannot exceed your taxable income minus any capital gains. For example, if you are a sole proprietor with a net profit of $90,000 (and no excluded items) on your Schedule C and your taxable income is $100,000 (no capital gains), your QBI deduction is $18,000 ($90,000 x 20%). What limitations apply? Once your taxable income is higher than the taxable income threshold for your filing status, then various limitations come into play. The exact formula for determining the deduction (there are special rules for income from REITs and publicly traded partnerships that is not explained here) is the lesser of: 20% of your QBI, or The greater of (a) 50% of W-2 wages or (b) the sum of 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property. In addition to the W-2 limitation and the property limitation, there is a special limitation for a specified service trade or business (defined below). Only a percentage of QBI, W-2 wages, and the unadjusted basis of property can be taken into account. Once an owner of a specified service trade or business has taxable income over $207,500 if single, or $415,000 if married filing jointly, then this limitation means no deduction can be claimed. What are the special terms to know? There are a number of special terms you need to know in order to figure the deduction: W-2 wages. These are wages reported on W-2s to employees (including wages to S corporation owner-employees), plus elective deferral contributions to 401(k)s and similar plans and certain deferred compensation. Specified service trades or businesses (SSTBs). These are any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners (a catchall category). Architecture and engineering are specifically not included in the list of fields. Fortunately, the IRS has narrowly construed the meaning of the catchall category so that the skill or reputation of an owner will be an SSTB only if the person receives payment for endorsing products or services, licensing the taxpayer’s images, or receiving fees for media appearances. For instance, a chef who owns restaurants and also endorses a line of cookware, only the income from the endorsement will be treated as an SSBT; the income from the restaurants won’t be tainted and subject to the SSBT limitation. Unadjusted basis immediately after acquisition (UBIA) of qualified property. This is essentially the cost of depreciable tangible property as of the date it’s placed in service. So if your sole proprietorship buys a $10,000 machine and begins to use it on March, 1, 2018, you have UBIA of $10,000, even if you write-off the entire cost on your 2018 return. Conclusion If you think the QBI deduction sounds complicated, then you are correct. Fortunately, the actual computation of the deduction is done automatically by software. The important concepts to understand are the overall landscape of the deduction and the new terms that come into play. An upcoming post will provide more guidance on grouping and splitting businesses and other aspects of this complicated but very important deduction. Stay tuned! Attend our webinar

  News of the General Data Protection Regulation (GDPR) has been floating in our peripherals since it was passed by the European Parliament back in 2016, but as of May 25, 2018, the privacy-focused piece of legislation will finally go into effect. And, though it’s specifically designed for those in the EU, American business owners are not exempt from impact. As an American business owner with your own set of privacy rules and regulations to contend with, the GDPR may not seem like much of a concern. However, since the regulations impact all organizations that process or hold EU customer data, any American business that falls into that category (i.e., businesses that have a web presence and/or sells their products to citizens within the EU) will need to comply. You’ll note that “web presence” was included, not just the notion of selling products or services. That’s specifically because of stipulations that focus on the collection of personal data, not just monetary transactions So, any organization that collects identifiable information (PII), which includes social security numbers, phone number, salary, race, marital status, military rank or civilian grade, age, medical records etc., from EU citizens will need to be in compliance. Top GDPR Takeaways for Small Businesses You know what the GDPR is, generally, but what specific things will be required of businesses? Here are a few of the most significant regulations and considerations that you’ll need to take into account if you want to be in compliance. Seventy-two-hour breach notification:  Just like it sounds, any organization or company that detects a customer data breach must notify the national authorities within seventy-two hours of that breach, and in some cases, customer notification must also take place. Consent for data is a must: Companies and organization must obtain explicit and informed consent when collecting and/or processing data from individuals, even if it’s something as simple as an email list. Explicit consent should be used if an organization wants to validate the sensitive data for use. Additionally, the consent must be achieved with a clear affirmative action, which means that those companies can no longer use “opt-out” or pre-checked boxes to achieve that consent. Further, consent requests must be separate from terms and conditions; cannot, in most cases, be a contingency for signing up; must be granular or designed in such a way that consent is specific to each type of processing; and named, meaning the individual must be made aware of what organizations or third-parties rely on that consent. Finally, organizations must document the aforementioned consent, including the specific consent requested/provided and when that consent took place, individuals must have the right to withdraw their consent at any time, and organizations must provide information about how an individual can withdraw their consent as well as an easy path to do so.   The right to be forgotten: organizations and businesses must comply with a request by an individual to “be forgotten” or to have a copy of their data.  Though simplistic in theory, the right to be forgotten will require that all organizations be able to delete not only primary data but also any data duplications, be they due to operational processes (i.e., cloud storage backup) or unspecified employee lead duplication.  This will require universal conversations and policies among all departments and employees who can access, copy or otherwise maintain customer data. Any data processed for a child under sixteen is considered unlawful if there is no prior parental consent; however, states within the EU can opt to reduce that age, with 13 years of age representing the cutoff. The aforementioned are just a few of the more specific requirements that business owners must meet if they want to become compliant with the GDPR.  Some of these requirements may take a few weeks (or months) to plan and execute, and so, as mentioned above, it’s best to start as soon as possible if you haven’t already. To get started, or make sure your efforts are aligned with expectations, considering the following steps. Analyze your current data processes; this includes how you obtain data as well as how you process and maintain that data. If you don’t have one already, you should have a Personal Information Assessment (PIA), and in some cases, you may need a Data Protection Impact Assessment. Work with your legal department to fully understand and address the GDPR requirements (like the DPIA; however, efforts should extend past legal departments or consultants and include contact with multiple departments, including IT, Marketing, and Finance, as many are directly involved or involved. Create a plan, not only for immediate compliance, but for long-term data procurement, management, and processing.  The end result should be a data privacy and security plan that can act as guidance for the future operations as well as documentation for compliance. Companies that don’t comply (or document that compliance) with the GDPR face substantial fines of up to four percent of global revenues. And while that amount can be damaging to any organization, small businesses that depend on every cent may suffer the most from non-compliance. During the next little while, your time will be especially precious as you work to ensure your business is compliant. The average business owner spends 33 hours applying for credit, you can save that time by checking with Nav. If you’re not currently compliant and the May 25th date is giving you anxiety, take a deep breath. Garnter, Inc. suggests that by the end of 2018, more than fifty percent of American businesses will be non-compliant.  Of course, that doesn’t mean that herd mentality will protect you from non-compliance in the event of a data breach – we all know how frequent they are these days.  For that reason, it’s important to address the issue immediately and take the steps required to meet GDPA requirements More from Nav The Best Small Business Checking Accounts Your Ultimate Guide to Small Business Loans What Is Cash Flow This article originally appeared on Nav.com. Jennifer is a alum of the University of Denver. While in the graduate program there, she enjoyed spending time identifying ways in which non-profits and small businesses could develop into strong and profitable organizations that while promoting strong community growth. She also enjoys finding unique ways for freelancers and start-up businesses to reach and expand their goals. More by Jennifer Lobb

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