What Retailers Need to Know about Navigating the New Tax Act
Contributed by Kevin Miller, CMO of Neat.
With the 2017 taxes season coming to an end, small business retailers will find themselves navigating a new tax act in 2018. Initially, the new act is viewed as a win for the majority of small businesses because – even if 2018 is a flat year profit wise – they will be incurring a significantly lower tax liability relative to 2017, which can open up various financial opportunities. Additional capital may allow small business retailers to hire more staff, increase advertising spend or even add an additional location.
Those retailers that want to add employees will need to take a closer look when considering if a new hire should be a W-2 or 1099. To put it simply, a W-2 employee’s payroll taxes are automatically deducted from their paycheck and paid to the government through the employer, while a 1099 is an independent contractor, responsible for calculating and remitting their own tax liabilities.
This decision is affected by a new aspect of the tax bill called the “Qualified Business Income Deduction” and only applies to pass through entities (sole proprietorships, S-corporations, partnerships, etc.). The deduction, however, is limited to the lesser of 20% of qualified business income or 50% of the total W-2 wages paid by the business.
So, if a retailer employs mostly independent contractors, their W-2 limitation would be small, ultimately meaning the Qualified Business Income Deduction would be small. There are a number of other implications, like healthcare, but at a certain point, it becomes a math equation that the retail owner should look at with their accountant or bookkeeper.
Another tweak to the new tax act that retailers need to be aware of is the change in meals and entertainment expense deductions. Prior to the new tax act, clients were able to deduct 50% of their meals and entertainment expenses, so when a retailer wanted to show their best supplier some appreciation, they could take them out for a round of golf or buy box tickets to see a local pro sports team, and expect the government to front half the bill. However, under the new bill, retailers cannot expect the government to chip-in.
Retailers also cannot expect the government to pay for half of meal expenses, unless the owners or employees are traveling. So, if a retail business is at an industry summit with their top managers, and the team goes out to grab something to eat, the meal is fully refundable… but if an owner wants to build team morale with a Thursday evening happy hour, they should expect to front the entire bill.
These new entertainment and expense aspects of the tax bill make it that much more important for retailers to make sure they are keeping sound records of all business receipts. In today’s always connected business world, advanced business technology makes it easier than ever to simply capture and store receipts and other business documents. There are a number of apps available to retailers that enable them to snap a photo of their business document and upload the important data points to their accounting and bookkeeping software. Additionally, many of the apps store the records in the cloud, allowing the owner, manager or accountant to access the vital business information from anywhere.
As today’s small business retailers begin to turn to the 2018 tax calendar, it is important that they do not go at it alone. When deciding what type of employees to hire, or what kind of expenses are deductible, retailers should rely on their accountants and bookkeepers – who act as trusted advisors. It is an accountant and bookkeeper’s responsibility to know the ins-and-outs of the new tax act and make sure the small business retailer is maximizing earnings while remaining compliant at all times.
Contributed by Kevin Miller, the CMO of Neat, a recognized leader in software that provides small businesses with the ability to track and manage their expenses and spending.