Preparing Your Business for 2018 Tax Reform Filing by Craig Auer, CPA, Principal, AuerCPA Co.

The 2018 Tax Reform Bill signed into Congress in December 2017 is the biggest tax law change in 40 years.  Now that your 2017 books are closed and your 2017 taxes are ready to be filed, careful consideration needs to be made to prepare your business for your 2018 tax filing. 

Companies that have elected to file taxes as S Corporations will likely be the most affected by the 2018 Tax Reform Bill.  Those companies may consider filing as a C Corporation, the default category of companies that have not elected to file as S Corporations, but have to make the switch before March 15, 2018 in order for the C Corporation filing status to be effective for 2018 tax returns.

In the past, C Corporations have been taxed at income tax rates ranging from 15% to 35%.  Under the 2018 Tax Reform Bill, C Corporations will now be taxed at 21% across the board.

Currently, there is no business deduction when filing taxes as an S Corporation; any profit income is “pass-through income” that goes to the owner of the company to file on his personal income tax return.  Under the new law, an owner of an S Corporation will be given a 20% Qualified Business Income Deduction. This will effectively reduce personal income taxes. 

Simple Real Life Example:

A manufacturing company filing as an S Corp has a net profit of $234,000 in 2018.   The owner files W-2 income of $108,000.00 and Qualified Business Income of $234,000 on his 2018 Income Tax Return.  He is filing with a Married Filing Jointly status and will be able to take a 20% Qualified Business Income Deduction of $46,800 making his total taxable income $295,200.  After $32,000 in itemized deductions, his total tax liability will be $97,384.  (His company remained flat from 2017 to 2018.  His tax liability in 2017 was $102,145.)

However, there are exceptions for the type of businesses that can claim the S Corporation Qualified Business Tax Deduction.   Entities that are considered “service businesses” will not be eligible to take the 20% deduction for pass-through income.  The businesses specifically included as “services businesses” are:  Health, Law, Accounting, Actuarial Sciences, Performing Arts, Consulting, Athletics, Financial Services, and any other trade or business where the principal asset of the business is the reputation or skill of 1 or more of its employees.  Architects and Engineers are not considered “service businesses”. 

The 20% pass-through deduction will be implemented in a “phase-out” for those currently in service industries.  There will be income thresholds with the upper limit for Individuals is $157,500 and Married Filing Jointly is $315,000.  Once an owner reaches $207,500 for an Individual or $415,000 for Married Filing Jointly, they are no longer eligible for the 20% pass-through deduction.

There are many more complications, exceptions, and questions yet to be answered in the 2018 Tax Reform Bill and if you are a small business owner, I advise that you meet with your CPA in the first quarter of 2018 before March 15th to ensure that you will not be taken by surprise when it’s time to close the books out at the end of December.  After careful evaluation of your financial status, your CPA may or may not recommend that you change how your organization is classified with the IRS.

Craig Auer, CPA, Principal at AuerCPA Co.,  is a Tax Reform Specialist with over 20 years’ experience helping small business owners focus on their day to day business while he focuses on the financial health of their company.  AuerCPA Co. is a boutique accounting agency that has a team of professionals who are ready and dedicated to helping small business owners, executives, and independent professionals run their businesses with ease by taking on the financial supervision of their organizations.  419 Canyon Ave, Suite 224, Fort Collins, CO, 80521;  (970) 797-3227  


As the driving force in today's economy, small businesses benefit from numerous tax breaks in the tax code. One of these, the Qualified Small Business Stock (QSBS), was just made permanent, thanks to the passage of the PATH Act (Protecting Americans from Tax Hikes Act of 2015). If you're a small business investor, here's what you need to know about this often overlooked tax break.

What is the Qualified Small Business Stock (QSBS) Exclusion?

Sometimes referred to as Section 1202 (after Section 1202 of the Internal Revenue Code, PATH made permanent for taxpayers (excluding corporations) the exclusion of 100 percent of the gain on the sale or exchange of qualified small business stock (QSBS) acquired after September 27, 2010, that is held longer than five years.

Further, QSBS gain excluded from income is not subject to 3.8 percent Obamacare tax on "Net Investment Income" from capital gains (and other investment income) on high-income taxpayers.

The definition of a qualified small business under the IRS varies; however, examples of businesses that do NOT qualify include, but are not limited to:

  • A regulated investment company,
  • A real estate investment trust (REIT)
  • One involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services;
  • Any business of operating a hotel, motel, restaurant, or similar business.
  • Any farming business (including the business of raising or harvesting trees).


What are the Tax Benefits of QSBS?

Two tax provisions apply to gain from the sale or trade of qualified small business stock. Taxpayers may qualify for a tax-free rollover of all or part of the gain, or they may be able to exclude gain from income.

What is Qualified Small Business Stock?

Qualified small business stock is stock that meets all of the following tests:

  1. It must be stock in a C corporation.
  2. It must have been originally issued after August 10, 1993.
  3. The corporation must have total gross assets of $50 million or less at all times after August 9, 1993, and before it issued the stock. Its total gross assets immediately after it issued the stock must also be $50 million or less.
  4. When figuring the corporation's total gross assets, you must also count the assets of any predecessor of the corporation. In addition, you must treat all corporations that are members of the same parent-subsidiary controlled group as one corporation.
  5. You must have acquired the stock at its original issue, directly or through an underwriter, in exchange for money or other property (not including stock), or as pay for services provided to the corporation (other than services performed as an underwriter of the stock). In certain cases, your stock may also meet this test if you acquired it from another person who met this test, or through a conversion or trade of qualified small business stock that you held.
  6. The corporation must have met the active business test, defined next, and must have been a C corporation during substantially all the time you held the stock.
  7. Within the period beginning two years before and ending two years after the stock was issued, the corporation cannot have bought more than a de minimis amount of its stock from you or a related party.
  8. Within the period beginning one year before and ending one year after the stock was issued, the corporation cannot have bought more than a de minimis amount of its stock from anyone, unless the total value of the stock it bought is five percent or less of the total value of all its stock.

Qualified stock must also meet the active business test and it can't be an investment vehicle or an inactive business. A corporation meets this test for any period of time if, during that period, both the following are true:

  • It was an eligible corporation, defined below.
  • It used at least 80 percent (by value) of its assets in the active conduct of at least one qualified trade or business.


The QSBS exclusion, as with many tax provisions, is complicated. Don't hesitate to call if you have any questions or would like more information on this topic.


If you're thinking about hiring new employees this year, you won't want to miss out on these tax breaks.

1. Work Opportunity Credit

The Work Opportunity Tax Credit (WOTC) is a federal tax credit for employers that hire employees from the following targeted groups of individuals:

  • A member of a family that is a Qualified Food Stamp Recipient
  • A member of a family that is a Qualified Aid to Families with Dependent Children (AFDC) Recipient
  • Qualified Veterans
  • Qualified Ex-Felons, Pardoned, Paroled or Work Release Individuals
  • Vocational Rehabilitation Referrals
  • Qualified Summer Youths
  • Qualified Supplemental Security Income (SSI) Recipients
  • Qualified Individuals living within an Empowerment Zone or Rural Renewal Community
  • Long Term Family Assistance Recipient (TANF) (formerly known as Welfare to Work)

The tax credit (a maximum of $9,600) is taken as a general business credit on Form 3800 and is applied against tax liability on business income. It is limited to the amount of the business income tax liability or social security tax owed. Normal carry-back and carry-forward rules apply.

For qualified tax-exempt organizations, the credit is limited to the amount of employer social security tax owed on wages paid to all employees for the period the credit is claimed.

Also, an employer must obtain certification that an individual is a member of the targeted group before the employer may claim the credit.


Note: The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) retroactively allows eligible employers to claim the Work Opportunity Tax Credit (WOTC) for all targeted group employee categories that were in effect prior to the enactment of the PATH Act, if the individual began or begins work for the employer after December 31, 2014 and before January 1, 2020.


For tax-exempt employers, the PATH Act retroactively allows them to claim the WOTC for qualified veterans who begin work for the employer after December 31, 2014, and before January 1, 2020.

2. Empowerment Zones

This tax credit provides businesses with an incentive to hire individuals who live and work (either full-time or part-time) in a federally designated Empowerment Zone (EZ). The credit is equal to 20 percent of the first $15,000 (up to $3,000) in wages earned in a taxable year if the employee lives and works in an empowerment zone (urban or rural). This credit can be combined with state enterprise zone credits as well.


Note: The PATH Act extended the tax credit retroactively to apply to the period from January 1, 2015, through December 31, 2016.


3. Disabled Access Credit and the Barrier Removal Tax Deduction

Employers that hire disabled workers might also be able to take advantage of two additional tax credits in addition to the WOTC.

The Disabled Access Credit is a non-refundable credit for small businesses that incur expenditures for the purpose of providing access to persons with disabilities. An eligible small business is one that earned $1 million or less or had no more than 30 full-time employees in the previous year; they may take the credit each and every year they incur access expenditures. Eligible expenditures include amounts paid or incurred to:


1. Remove barriers that prevent a business from being accessible to or usable by individuals with disabilities;


2. Provide qualified interpreters or other methods of making audio materials available to hearing-impaired individuals;

3. Provide qualified readers, taped texts, and other methods of making visual materials available to individuals with visual impairments; or

4. Acquire or modify equipment or devices for individuals with disabilities.


The Architectural Barrier Removal Tax Deduction encourages businesses of any size to remove architectural and transportation barriers to the mobility of persons with disabilities and the elderly. Businesses may claim a deduction of up to $15,000 a year for qualified expenses for items that normally must be capitalized. Businesses claim the deduction by listing it as a separate expense on their income tax return.

Businesses may use the Disabled Tax Credit and the architectural/transportation tax deduction together in the same tax year if the expenses meet the requirements of both sections. To use both, the deduction is equal to the difference between the total expenditures and the amount of the credit claimed.

4. Indian Employment Credit

The Indian Employment Credit provides businesses with an incentive to hire certain individuals (enrolled members of an Indian tribe or the spouse of an enrolled member) who live on or near an Indian reservation. The business does not have to be in an empowerment zone or enterprise community to qualify for the credit, which offsets the business's federal tax liability.

The credit is 20 percent of the excess of the current qualified wages and qualified employee health insurance costs (not to exceed $20,000) over the sum of the corresponding amounts that were paid or incurred during the calendar year of 1993 (not a typo).

5. State Tax Credits

Many states use tax credits and deductions as incentives for hiring and job growth. Employers are eligible for these credits and deductions when they create new jobs and hire employees that meet certain requirements. Examples include the New Employment Credit (NEC) in California and Empire Zone tax credits in New York.

Wondering what tax breaks your business qualifies for?

Help is just a phone call away!


If you are living or working outside the United States, you generally must file and pay your tax in the same way as people living in the U.S. This includes people with dual citizenship.

In addition, U.S. taxpayers with foreign accounts exceeding certain thresholds may be required to file Form 114, known as the "FBAR" as well as Form 8938, also referred to as "FATCA."


Note: FBAR is not a tax form, but is due to the Treasury Department by June 30, 2016, and must be filed electronically through the BSA E-Filing System website. Starting in tax years after December 31, 2015, the FBAR will be due on April 15 and may be extended to October 15.


FATCA (Form 8938) is submitted on the tax due date (including extensions, if any,) of your income tax return.


Here's what else you need to know about reporting foreign income:

1. Report Worldwide Income. By law, Americans living abroad, as well as many non-U.S. citizens, must file a U.S. income tax return and report any worldwide income. Some key tax benefits, such as the foreign earned income exclusion, are only available to those who file U.S. returns.

2. Report Foreign Accounts and Assets. Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts.

3. File Required Tax Forms. In most cases, affected taxpayers need to file Schedule B, Interest and Ordinary Dividends, with their tax returns. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

Some taxpayers may need to file additional forms with the Treasury Department such as Form 8938, Statement of Specified Foreign Financial Assets or FinCEN Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts ("FBAR").

FBAR. Taxpayers with foreign accounts whose aggregate value exceeded $10,000 at any time during 2015 (or 2016) must file a Treasury Department FinCEN Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts ("FBAR").

Form 8938. Generally, U.S. citizens, resident aliens, and certain nonresident aliens must report specified foreign financial assets on Form 8938, Statement of Specified Foreign Financial Assets if the aggregate value of those assets exceeds certain thresholds:

  • If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year
  • Taxpayers who do not have to file an income tax return for the tax year do not have to file Form 8938, regardless of the value of their specified foreign financial assets.

The threshold is higher for individuals who live outside the United States and thresholds are different for married and single taxpayers. In addition, penalties apply for failure to file accurately.

Please contact the office if you need additional information about thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted and what information must be provided.


Note: An individual may have to file both forms, and separate penalties may apply for failure to file each form.


4. Review the Foreign Earned Income Exclusion. Many Americans who live and work abroad qualify for the foreign earned income exclusion when they file their tax return. This means taxpayers who qualify will not pay taxes on up to $101,300 of their wages and other foreign earned income they received in 2016 ($100,800 in 2015). Please contact the office if you have any questions about foreign earned income exclusion.

5. Don't Overlook Credits and Deductions. Taxpayers may be able to take either a credit or a deduction for income taxes paid to a foreign country. This benefit reduces the taxes these taxpayers pay in situations where both the U.S. and another country tax the same income. However, you cannot claim the additional child tax credit if you file Form 2555, Foreign Earned Income or Form 2555-EZ, Foreign Earned Income Exclusion.

6. Automatic Extension. U.S. citizens and resident aliens living abroad on April 18, 2016, qualified for an automatic two-month extension (until June 15) to file their 2015 federal income tax returns. The extension of time to file also applies to those serving in the military outside the U.S. Taxpayers must attach a statement to their returns explaining why they qualify for the extension. Please call if you haven't filed a 2015 tax return.

7. Get Tax Help. If you're a taxpayer or resident alien living abroad that needs help with tax filing issues, IRS notices, and tax bills, or have questions about foreign earned income and offshore financial assets in a bank or brokerage account, don't hesitate to call.