Tax changes are coming for your small business
Anyone who tells you they know what Congress is going to do is either lying or selling something. Even so, business owners should be paying very close attention to some of the tax-reform proposals that are circulating around Washington.
When I think of the entrepreneurs with whom I work, there are three things under consideration in Washington that could hit their wallets hard -- and radically alter how they run their businesses.
One pernicious idea comes from the House Ways and Means Committee, the tax-writing panel that in September released a sweeping set of tax overhauls that, if enacted, would affect individuals and businesses far and wide. For our purposes I'll focus on the revamp of the qualified business income tax deduction.
House Democrats are seeking to roll back the 20% QBI deduction enacted in the 2017 tax overhaul, instead capping the deduction at $500,000 for married couples filing jointly and $400,000 for individual filers.
When considering tax changes, it's always important to stress that nothing's final until the bill is signed into law, but business owners should be aware of what's under consideration and begin gaming out how they might respond. The QBI proposal, for instance, could eliminate a major tax break that business owners have come to rely on, and could prompt them to consider ways to lower their reportable business income to limit their tax liability.
Major labor law overhaul?
Secondly, the House has already passed a major overhaul of labor law that could make more independent contractors eligible to be deemed employees and organize in unions. This is modeled after California's law that’s meant to address gig workers, but could have a profound impact on how companies work with their contractors.
A good start for business owners to get ahead of this potential change might be to consider talking with the contractors they rely on the most about forming a business entity, so the relationship becomes one between two companies, rather than one company and one independent contractor.
Bulking up the IRS
Finally, there is Biden's proposal to substantially bulk up the audit staff at the IRS. Seeking to add $80 billion to the agency's budget, Biden promises that a beefed-up IRS will crack down on businesses and wealthy individuals that aren't paying their share in taxes, promising $700 billion in increased tax revenue over the next 10 years.
Going after tax cheats? Fine. But I worry that this is going to result in an army of aggressive tax inspectors, some with dubious qualifications, harassing small business owners with frivolous audits. This is the time to scrub your accounting operation clean. Do everything possible to make your firm an unattractive target for an audit, and to be sure that if an audit does come, you're prepared to defeat it in court, if need be.
Bruce Willey, JD, CPA, is the founder of American Tax & Business Planning, LLC. He has been advising business owners on accounting, tax and wealth-building strategies for more than three decades. To speak with him or another ATBP expert, please reach out here or at https://www.americantbp.com/contact-american-tax-and-business-planning.