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Cecily VM Welch, CPA, is owner of Welch Financial Advisors, LLC. Cecily started her career as an internal auditor at Honeywell where she audited several international locations. She then transitioned to financial consulting with PriceWaterhouse and specialized in taxation at midsize and small firms in Georgia before starting her own firm in 2013. She has worked 25 years in both private and public accounting.

Cecily joined The Georgia Society of CPAs in 2001 and has been an active member. In May of this year, she was on a panel of speakers as part of the AICPA Accounting Scholars Leadership Workshop (ASLW), which is a program for minority accounting students who plan to pursue the CPA credential. She is also the past-chair of GSCPA’s Tax Task Force and has served on this task force for many years.

In additional to her involvement with GSCPA, she is a past subgroup chair on the IRS Advisory Council (SBSE Subgroup) and is an AICPA CPA Ambassador. Cecily graduated from North Carolina A&T State University with a bachelor’s in science in accounting and from the University of Wisconsin with an MBA.

From conversations with several business clients, the depreciation rules have gotten so complicated that
they just ignore them and leave it to us accountants to figure out. Each year there have been laws that
update, change, or sunset the thresholds and/or the expensable amounts. It’s very difficult to keep up
with the figures or why it matters. Head’s up, for those tax accountants reading this, this explanation
won’t appease your technical knowledge, it’s just an overview and doesn’t cover the nuances
Below is a basic overview of how the rules work and why these are special depreciation rules, meaning,
in order to get an expense deduction, appropriate purchases still have to be capitalized.
Recall the basic rule of items purchased that last more than 1 year, this hasn’t changed. In general,
these items must be capitalized. Meaning, they get listed on an asset schedule and the expense gets
spread over several years depending on IRS defined depreciable lives. For purposes of this ‘explanation
on how it works’ we’ll assume a company purchases a $500,000 piece of equipment. And we’ll assume
it gets depreciated (expensed on the P&L) over 5 years on a straight-line basis per ‘regular’ depreciation
rules, so $100,000 depreciation per year. Further, assume the business has total income of $20M and
total expenses of $19,800,000. Therefore, ignoring the new piece of equipment, the business has net
income of $200,000.

*One of the stipulations on Section 179 is that it can not create a loss for the business. Therefore, even
if the threshold for maximum Sec 179 deduction is $1M (which it currently is) it is limited. And no, it
doesn’t carry forward to the next year for the business. In the above example, only $200,000 Section
179 was taken, leaving $800,000 “on the table”. But this just goes away, it does not mean the next year
the company has $1,800,000 of Section 179 they can use. Next year they still just have the $1M
The above example seems pretty straight forward, however, we are talking about tax law here.
Therefore, there are a lot of caveats and considerations about how/when/amount of the above items.

The thresholds for if your company qualifies to use any of these special depreciation rules, what these
rules can be applied on, and the amount that is allowable has changed each year – sometimes
retroactively. For example, the amount of Section 179 deduction an individual taxpayer can take on
their personal tax return is limited. This was more of a problem in prior years, i.e. prior to 2008 Section
179 deduction was limited to $125K per taxpayer. Therefore, if a taxpayer had ownership in 3
companies that each took $100K, then although they received $300k of Section 179 deduction, they
were only allowed $125K on their tax return. Further, if an asset is sold prior to the ‘regular depreciable
life’ then it’s a deduction that has to be recaptured.
Section 179 has been changed by the following law changes (6 of which occurred at or after the end of
the year it impacted):
• ′Economic Stimulus Act of 2008′ (signed 02-13-2008)
• ′American Recovery and Reinvestment Act of 2009′ (signed 02-17-2009)
• ′Hiring Incentives to Restore Employment Act of 2010′ (signed 03-18-2010)
• ′Small Business Jobs and Credit Act of 2010′ (signed 09-27-2010)
• ′Tax Relief, Unemployment Insurance Reauthorization, Job Creation Act′ (signed 12-17-2010)
• ′The American Taxpayer Relief Act of 2012′ (signed 01-2-2013)
• ′The Tax Extenders Bill′ (signed 12-19-2014)
• ′The Protecting Americans from Tax Hikes Act of 2015′ (signed 12-17-2015)
• ′The Tax Cuts and Jobs Act′ (signed 12-22-2017)
The list of Section 168 (bonus depreciation) changes is nearly as extensive. Sometimes it has allowed a
50% deduction or 30% deduction, and currently it’s a 100% deduction (effective Sept 27, 2017). No, I
can’t explain why the TJCA retroactively created a 100% deduction effective 9/27/17 – but that’s what
the law is. You can see by the above why businesses like the depreciation acceleration provisions. It
allows the business to expense items in the current year when typical rules have the expense spread
over several years. However, it is also very important that you use a tax professional who understands
these rules to help your business plan for the year. Please note, this overview is not designed to be a
commercial for my profession, us accountant’s didn’t come up with these rules, we just have figure
them out. The complexity and constant changes frustrate us as well, because it makes it difficult to help
our clients plan or predict financial outcomes.

Has to be said, the above general information is not to be interpreted as specific tax advice
and before implementing any tax strategies, consult your own tax advisor.

 

Dear Business Clients,

During our time working together, we went over a number of tax-related topics. However, with it being
a new tax year and with a new tax law among us, I thought it would be prudent to go over some of these
topics again. Keep reading for a quick refresher.

1099s/ W-9

Now that we’ve gone through the 1099 cycle, it’s a good time remind you to obtain a W-9 form from any
vendors, contractors, etc. before you pay them this year.

This is the tax law, but unfortunately, it’s an area of tax law that businesses have neglected. Because of
this, the IRS has increased scrutiny in this area and the penalties for not filing 1099’s when required are
getting pretty steep. The only way to determine if a person, vendor or will need a 1099 is by having a W-
9 on file. The intricacies for when or if a 1099 is required isn’t as straightforward as we would like it to
be; therefore do not make assumptions. For all people, vendors or contractors you pay in 2018, please
get a completed and signed W-9 from them, and put it in a file (and send to your
bookkeeper/accountant).

If your business does not want to get W-9’s then you can choose to ONLY pay expenses (all expenses)
via credit or debit card, Square or PayPal. If your business pays expenses in any other way such as
checks, ACH or cash, get a W-9.

Other Annual Compliance

If you have not renewed your state registration for your business yet, be sure to do so as soon as
possible. Georgia business owns can do so online at https://ecorp.sos.ga.gov/. The deadline is April 1.

You also need to renew your business license, which should not be confused with the state registration.
Your city or county typically administers the business license. If you are renewing your licenses, you
probably received the renewal in the mail Some counties will let you renew online. Also remember that
license renewals are county specific, and dates, process and the cost can differ.

Additionally, be sure to complete your Business Personal Property Tax (BPPT) return for your respective
county. Like the business license, you should have received your BPTT return renewal information in the
mail. Similarly to how you pay a vehicle tax based on its value every year at renewal, business have to do
the same for their business property they own. This involves items like desks, inventory and computers.

To be honest, this does not make sense to me. Is this required for home-based businesses for those with
a storefront? If so, then I’ve never did it as I imagine many others have not either.

This is also an ideal time to check if you have any other tax filing requirements based on your facts and
circumstances and if you’re meeting those obligations (sales tax, payroll tax, etc.).

New Tax Law—Some changes to make immediately

If you do your own bookkeeping, it would be prudent to create a new account called “Entertainment” in
order to comply with the new tax law. This would be separate from the old “Meals and Entertainment”
expense category. Under the new law, Entertainment is not deemed deductible and thus needs to be
separately reported in the financial records.

Please note that yes, we, the IRS, I, etc. know that entertainment expenses can be legitimate business
expenses. That’s irrelevant—the law is not questioning if it’s a business expense, just that even if it’s a
legitimate business expense, it’s not a tax deduction anymore.

Also note, there are still many aspects of the new law that are unclear. If you do a search you’ll find
multiple analysis that state different conclusions. That’s because the IRS nor Congress has had time to
get into the details.

For example: are meals still deductible when you take clients out? Great question. But truthfully, no one
knows yet (there is commentary saying yes, commentary saying no), but none of it is authoritative. So
still track all business expenses and activity. Once rules of the new law are more fully vetted by
Congress and the IRS, more guidance will be available. In meantime, we do know that nothing is
deductible if it isn’t properly tracked and substantiated, so please continue to do this.

Remember that state tax law varies tremendously. Some states adopt part, all, or none of the new tax
law. So, as you’re considering business operations, recognize that state laws can be very different from
federal law and also very different from their neighboring states.

If your business is operating as a partnership (it’s an LLC, LP, LLP, etc.) then it would behoove you to
meet with a business attorney who is familiar with the recent changes to partnership audit tax law.
Since this wasn’t a change that occurred in the December 2017 Tax Cuts and Jobs Act, a lot of businesses
aren’t aware that partnership tax law was changed back in 2015 (with an effective date of January
2018). There are some changes to your partnership agreement that should be made (i.e. there’s no
longer something called a ‘Tax Matters Partner’) and it’s even more critical now to seriously think about
who or how the business will be represented if it is ever audited.

General things to remember

When it comes to substantiating expenses, remember you need BOTH the proof of payment (credit card
or bank statement) and the receipt for that expense. This is often hard for new business owners to
remember, but yes, both are necessary.

The easiest way to remember this requirement is imagine your purchases at Amazon. The credit card
statement will just say “Amazon”. The IRS (nor your accountant) has any idea if it’s for a business
expense or not and how it should be categorized. The purchase could be a desk for your office or sports
equipment for your son, the only way to know this is via the receipt.
Given how critical it is to keep receipts, and because receipts now fade, I strongly recommend
businesses invest in a scanner or consistently use a receipt storage software that you can take a picture
of receipts and categorize.

As business owners, you should be aware that you might get more pressure from your employees for
reimbursement of more expenses. From an employee’s financial management perspective, it’s always
better to get reimbursed for expenses versus deducting them. For example, if a business trip costs,
$100, it’s better to get the money back from the employer rather than taking a $100 $100 non-
reimbursed expense deduction on the tax return that would yield a savings of only $30 to $40.

However, with small businesses and certain business models it is very difficult to reimburse employees
for all expenses associated with doing their job well, so the ability to potentially deduct those expenses
offered at least some relief for the employee. The new tax law changes this: there is no ability to deduct
unreimbursed employee expenses going forward. Therefore, employers should be prepared for
employees to want to discuss reimbursable and non-reimbursable expenses policies at the company.

You’ve heard Welch Financial Advisors mention on several occasions that, yes, the financial and tax
compliance piece of business ownership is very time consuming and can be feel burdensome. However,
keeping accurate books and records is a basic expectation of a true business (from a bank’s perspective
if you want a loan, from the IRS’s perspective, if you’re under audit).

Recall, without accurate books and records and without operating like a business, the IRS has
reclassified many businesses’ “activities” as a hobby and thus disallowed nearly all expense deductions.
From their perspective, a true business does these things so they can run their business (identify
profitable clients from non-profitable clients, identify profitable product lines, make hiring and firing
decisions, etc.). The fact that these results end up on a tax return is just a byproduct of something the
business should be doing anyway.

I hope you find the above items helpful, and please contact Welch Financial Advisors for specific advice
and specific steps as it relates to your business. The above general information is not to be interpreted
as specific tax advice and before implementing any tax strategies, consult your own tax advisor.