By Kevin J. Hedrick, CPA
The first big tax deadline of the year is quickly approaching, and now that the new Tax Cuts and Jobs Act is in effect, many staffing company owners and finance officers need to know about the unique opportunities and liabilities—some obvious and some not-so-obvious—that the new law brings to our industry. Following are several additions and changes to the tax code that can impact staffing businesses. Keep in mind, though, that businesses are like fingerprints—no two are alike—so your business' tax strategy should be based on the parts of the tax code that directly relate to your operation.
What sounded like good news at first…
What sounded at first like good news for pass-through businesses—and many staffing businesses are structured as pass-throughs—may be limited for staffing businesses. The tax law added a new 20% deduction for qualified business income (QBI) from taxable income to owners of pass-through entities (partnerships, LLCs taxed as partnerships, and S corporations or sole proprietorships). However, the 20% deduction is limited to 50% of the business' wages paid to W-2 employees in the tax year. For staffing businesses that place independent contractors rather than W-2 employees, the 50% limitation seriously reduces the businesses' QBI, and therefor reduces the amount of the partners' deduction.
Will your business' structure hurt or help?
The opportunity is that staffing businesses can take a fresh look at their business structure to determine if it is still in line with their overall business strategy. Businesses that are structured as S corporations, or a combination of LLC and S corporation, aren't subject to corporate taxes on business income; the income/loss is passed-through to owners who are then taxed at individual income tax rates. Under the new tax law, some owners may find that a C corporation, which is taxed at the new flat 21% corporate rate for income and then taxed again when dividends are distributed to shareholders, would be more beneficial.
The new tax laws also open the door for C corporations and pass-through entities with a C corporation in the ownership chain that have an average of $25 million or less in gross receipts to choose between the accrual or the cash accounting method. Previously, C corporations with gross receipts over $5 million were required to use the accrual method. Pass-through entities with no C corporation ownership still can choose to use either the accrual or the cash accounting method regardless of income level. This change and the new lower corporate income tax rate may make the C corporation structure more beneficial in certain cases.
Limits and Losses
Another change to the tax code that could affect staffing businesses is the limit placed on the interest expense deduction. Going forward, the deduction for interest expense is limited to 30% of adjusted taxable income plus interest income for taxpayers with more than $25 million in average gross receipts for the last three years. This new limit ties the amount of deductible business interest to your adjusted taxable income, so an unsuccessful revenue year could reduce the deduction and increase your tax liability. Businesses can carry forward unused business interest expense indefinitely, treating it as additional interest expense in the next tax year. Also limited are state income tax deductions for pass-through entities. Individuals who itemize can deduct up to $10,000 for taxes paid, including real estate and state income taxes.
The Tax Cuts and Jobs Act has done away with the 50% deduction for certain business entertainment expenses. Business entertainment expenses are no longer deductible. Unreimbursed employee business expenses and other miscellaneous itemized deductions are no longer deductible for individuals. Meal expenses incurred during business travel are still 50% deductible, but meals provided in an on-premises cafeteria, or on premises for the convenience of the employer, are not.
Key to best tax strategy: an accountant who understands your business
As with the roll-out of any new law, issues are likely to come up that hadn't been anticipated and many states are making changes to their tax laws in response to the new federal laws. We encourage you to stay in close touch with your accounting advisors throughout the year and make sure they are researching and understand how the new tax law specifically impacts your staffing businesses. If you have questions about the new tax law and your staffing business, please call or email Kevin Hedrick, Tax Partner, at Williams Benator & Libby and Board member of GSA.
Kevin Hedrick, CPA, is an experienced tax strategist and leads Williams Benator & Libby's Staffing Industry Group. He advises staffing industry executives on the unique tax and financial issues their companies must address. Kevin is the Treasurer and on the Executive Committee of the Georgia Staffing Association. He is a member of the AICPA and the GSCPA. He can be reached at [email protected] or (770) 512-0500.