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office, you may be able to take additional expenses on your tax return. If you need a retail or commercial space for your small business, you should compare leasing to buying and be sure to factor in the tax benefits of owning. See Chapter 4 for more about real estate and taxes.

      Neglecting the timing of events you can control

      

As a small-business owner, you should pay attention to how your net income for the year is shaping up for the current year and how things are looking for next year. For example, if you’re in the early stages of your business and you can see that you’ll have more income next year, then it may be in your best interest tax-wise to delay paying some expenses from late in the current year into early next year. (This works when using cash basis accounting.)

      Or suppose that you operate on a cash accounting basis and think that you’ll be in a lower tax bracket next year. Perhaps business has slowed of late or you plan to take time off to be with a newborn or take an extended trip. You can send out some invoices later in the year so that your customers won’t pay you until January, which falls in the next tax year.

      Not using tax advisors effectively

      

If your financial situation is complicated, going it alone and relying only on the IRS publications to figure your taxes usually is a mistake. Many people find the IRS instructions tedious and not geared toward highlighting opportunities for tax reductions. Instead, you can start by reading the relevant sections of this book. When you’re overwhelmed by the complexity of particular small-business and tax decisions, get advice from tax and financial advisors who sell their time and nothing else. (Chapter 13 has tips on hiring help.)

As a small business owner, ask yourself how much you’re worth running your business versus how much you’re worth as a bookkeeper. Then ask yourself which task you enjoy more and consider hiring a bookkeeper.

      Note that using a tax advisor is most beneficial when you face new tax questions or problems. If your tax situation remains complicated or if you know that you’d do a worse job on your own, by all means keep using a tax preparer. If your situation is unchanging or isn’t that complicated, consider hiring and paying someone to figure out your taxes one time. After that, go ahead and try completing your own tax returns.

Noting How Corporate and Individual Tax Reform Impacts Small Business

      Corporate tax reform in the United States was long, long overdue. For too many years, corporations in the United States faced a much higher corporate income tax rate than did companies based in most overseas economies. As a result, increasing numbers of U.S. companies had chosen to expand more overseas rather than in the United States and to be headquartered outside of the United States, which wasn’t good for the long-term health of the U.S. economy and labor market.

      Congress passed the Tax Cuts and Jobs Act in late 2017, which took effect with tax year 2018. It was the most significant tax reform package passed since the Tax Reform Act of 1986. What follows are the highlights of the most significant provisions that affect (and mostly benefit) small business.

      Checking out corporate income tax rate reduction and simplification

      At 35 percent, the United States had had one of the highest corporate income tax rates in the world before 2018. The Tax Cuts and Jobs Act slashed the corporate income tax rate to 21 percent, which represented a 40 percent reduction.

      The corporate tax rules and deductions were simplified, including eliminating the corporate alternative minimum tax and closing some loopholes. The United States also moved to a territorial tax structure whereby U.S. companies would no longer pay a penalty to bring their overseas profits back home. The immediate impact of this change was to enable U.S. corporations to bring back to the United States more than $2 trillion being kept overseas to avoid excessive taxation.

The vast majority of small businesses aren’t operated as traditional so-called C-corps (more on those in a moment). Most small business owners operate as sole proprietorships (filing Schedule C), LLCs, partnerships, or S corporations. In those cases, the business owner’s profits from the business generally flow or pass through to the owner’s personal income tax return, and that income is taxed at personal income tax rates (see the section “Noting 20 percent deduction for pass-through entities” for more information).

      Reducing individual income tax rates

Just as the corporate income tax rate was reduced by the Tax Cuts and Jobs Act legislation, so too were the individual income tax rates. Most of the tax bracket rates were reduced by several percentage points (see Table 1-1). This, of course, is excellent news for the vast majority of U.S. small business owners who operate their businesses as pass-through entities (for example, sole proprietorships, LLCs, partnerships, S-corps).

TABLE 1-1 2022 Federal Income Tax Brackets and Rates

Federal Income Tax Rate	Single Taxpayers Taxable Income	Married Filing Jointly Taxable Income
10%	$0 to $10,275	$0 to $20,550
12%	$10,275 to $41,775	$20,550 to $83,550
22%	$41,775 to $89,075	$83,550 to $178,150
24%	$89,075 to $170,040	$178,150 to $340,100
32%	$170,040 to $215,950	$340,100 to $431,900
35%	$215,950 to $539,900	$431,900 to $647,850
37%	More than $539,900	More than $600,000

      Note that at higher levels of income, the individual income tax rates begin to exceed the 21 percent corporate tax rate. Seeing this helps you to better understand the next point as to why pass-through entities are being granted a special tax deduction on their profits.

      Noting 20 percent deduction for pass-through entities

In redesigning the tax code, Congress rightfully realized that the many small businesses that operate as so-called pass-through entities would be subjected to higher federal income tax rates compared with the new 21 percent corporate income tax rate. Pass-through entities are small business entities such as sole proprietorships, LLCs, partnerships, and S corporations and are so named because the profits of the business pass through to the owners and their personal income tax returns.

      To address the concern that individual business owners who operated their business as a pass-through entity could end up paying a higher tax rate than the 21

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