With no end in sight to the federal government shutdown, small businesses awaiting key clarifications to the new federal income tax code may not get the answers they seek for weeks or months to come.
Ambiguities in the new tax code approved by Congress in late 2017 will make it particularly difficult for self-employed Mainers in the real estate and insurance industries to file accurate tax returns, accountants said. Many are expected to file for extensions and simply wait it out until the answers arrive.
“There’s still a ton of guidance they haven’t issued yet,” said Mike Santo, senior tax manager at accounting firm Wipfli LLP in Augusta.
Many small businesses will have to decide whether to file for an extension to wait until the rules are clarified, or file a special form stating why they believe they are paying the correct amount in taxes despite the rules being unclear, Santo said.
The biggest uncertainty in the rules applies to real estate and insurance brokers and agents, he said. It’s not clear whether those professions are subject to an income cap on the newly created 20 percent tax deduction for small businesses. A draft version of the new rules said they weren’t subject to the cap, but then a later version said the opposite.
“It’s going to be a lot more work for us to figure out where they fall,” said accountant Pete Dufour of Dufour Tax Group in Portland. “There’s still a lot of gray area under these classifications.”
While the new rules for traditional corporations are fairly straightforward, the same cannot be said for the rules that apply to so-called “pass-through entities,” which include S-corporations, limited liability companies and sole proprietorships. The term “pass-through” refers to the fact that each of those entities’ net income is treated as the owners’ personal income for tax purposes and is taxed at the individual rate rather than the corporate tax rate.
The new rules give pass-though entities one major advantage over individuals: an additional 20 percent tax deduction. The purpose is to more closely align their overall tax burden with the corporate tax, which was reduced from 35 percent to 21 percent.
However, the new tax code singled out certain types of pass-through entities, mainly providers of professional services, by phasing out their 20 percent tax break starting at $157,500 for individual filers and $315,000 for joint filers.
The federal government has released more than 200 pages of rules pertaining to the new tax code, but those documents contain inconsistencies, said William Vernick, senior manager at Filler & Associates P.A. in Portland. Accountants were expecting to receive additional clarification and guidance by the end of this month, but that’s likely on hold now because of the partial shutdown.
That leaves many small businesses with two choices: play the guessing game or the waiting game.
“If there’s an expert on this right now, I’d like to meet them,” Vernick said.
J. Craig Anderson can be contacted at 791-6390 or at:
Twitter: jcraiganderson
UPDATE: The IRS issued a statement Jan. 8 saying it had made an error when it included real estate and insurance brokers and agents among the businesses subject to the small business deduction phase-out.
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