If you haven’t filed your taxes, you have about six weeks to prepare before the April 17th deadline. As a business owner, you may already pay estimated taxes. However, whether you are incorporated or a sole proprietor, like a freelancer, you are probably pondering what to report for 2017. Tax issues from the previous year may be distracting you from critical tax decisions for 2018.
This year brings tax changes more so than previous years. Therefore, you'll need to put time aside to review the critical tax issues and decide how to address them throughout 2018. Here's what to consider and suggestions on an appropriate course of action:
Tax Issues for the Gig and Sharing Economies
Many small business owners are actually freelancers and participate in the gig economy. Or, you may have a side gig that has helped propel the sharing economy. Many of you that work in these two economies receive 1099-K forms that report all payments received in the form of debit and credit cards, gift cards, and direct deposits. This also includes those processed through third party companies within the sharing economy, such as Uber or Airbnb. These are different than the 1099-MISC that freelancers tend to receive.
To receive a 1099-MISC, you need to make at least $600. For a 1099-K, the minimum is $20,000 and 200 transactions. Many people in the gig economy do not make this, and therefore don't receive these statements. That means the income can essentially disappear and not get recorded as taxable. However, this is set to change as states want part of this revenue. For example, states like Massachusetts and New Jersey have already lowered the 1099-K earnings threshold from $20,000 to $1,000. Other states, such as Vermont, California, and New York, are going to follow. The federal government is also exploring how to ensure all gig workers share their income in the form of a tax.
If this applies to you, you will need to be diligent in keeping records of these earnings and reporting the income on your state and federal tax returns. Consider how reporting this income will change your tax basis. Plus, you won't want to put yourself at risk for the IRS' decision to assess penalties for incorrect income filings. You'll need to think of a way to automate how you track all your revenue from these gigs to ensure what you have matches what you are to report to state and federal tax bodies.
Cryptocurrency Tax Implications
With more in the news about the price and use of cryptocurrency like Bitcoin, you may be considering adding this to your business or dabbling in it for investment purposes. First, there is the volatility of cryptocurrency prices to contemplate. It can be a lucrative investment and a way to make money for your business, but it can also lead to shocking drops in the value.
Second, you'll need to consider how the IRS accounts for cryptocurrency for tax purposes. As of 2018, all the information on taxing cryptocurrency can be found in a bulletin that the IRS issued in 2014. As of now, the IRS treats cryptocurrency as property, which means looking at capital gain (and loss) implications for the cryptocurrency you have bought and sold. If you make a profit when selling your cryptocurrency in exchange for traditional currency like U.S. dollars (USD), that profit, or capital gain, will be taxed. Yet, if your cryptocurrency loses value, you can claim that capital loss on your taxes.
You'll need to think about how long you hold the cryptocurrency before spending it, keeping in mind whether it becomes subject to short-term or long-term capital gains tax. Maybe you are considering using that cryptocurrency to pay wages to employees. You'll still have to report it on a W-2 because the money is still subject to federal income tax withholding and payroll taxes. If it's a payment for services to a freelancer and goes over $600, you'll still need to issue a 1099.
To ensure you account for this properly on your tax reporting, it's critical to keep detailed records of all cryptocurrency transactions that you did using exchanges. This is an important issue to discuss with your tax professional.
Tax Changes and Business Structures
The new tax law that went into effect on January 1, 2018, includes several significant changes that relate directly to corporate income tax. The advantages may make you want to consider how you legally structure your small business. For example, the corporate tax rate has been lowered to 21%. This offers a significant tax cut for C corporations. Additionally, small businesses that operate as pass-through entities, such as LLCs, sole proprietors, partnerships, and S corporations), can take a new deduction of 20% of the owners’ business income. What will change for sole proprietors is the ability to itemize, which may make it more attractive to change how the business is structured and how income and expenses are accounted for.
While changing your business structure in 2018 may be a possibility, it could also generate other types of tax obligations. Plus, you'll have to go through other hassles. This includes more paperwork, greater regulatory reporting requirements, and other costly or time-consuming tasks. It's best to consult a tax professional who can tell you which options are best considering the new tax laws now on the books.
Places to Seek Further Expert Advice
Tax professionals come in many forms. For example, you can talk to a tax lawyer who works with CPAs. They understand current tax issues and dilemmas that businesses face. You most likely already use a CPA for your business. Therefore, they are also the go-to expert on making critical tax decisions for the rest of 2018. Or, consider working with an enrolled agent to address any IRS issues that you may face in 2018. No matter what you plan or think you should do in regards to tax issues in 2018, it is good to get detailed advice about your individual business situation and financial goals.