What Salons and Spas Need to Know About the New Tax Law
Larry Kopsa, CPA and founder of the 30-member firm of Kopsa Otte CPAs, will join SALON TODAY at the Data-Driven Salon Summit in Atlanta, Georgia, on May 22, where he'll help salon owners and managers navigate the new tax law and understand how it can impact their businesses. Beforehand, he sat down for an exclusive interview with SALON TODAY to answer a few questions about the new law. Kopsa Otte specializes nationwide in accounting, tax and advisory services for salons, spas and distributors.
Salon Today: What is the one thing that you usually start off telling people when they ask about the new tax law?
Kopsa: The first thing I remind people is that, except for a couple of provisions, the new law is for 2018 not 2017. Even though this is the case taxpayers need to be analyzing their situation so that they can take advantage of the changes. They can’t wait until the end of 2018.
Salon Today: In your opinion what is the biggest gift in the new law for small businesses?
Kopsa: Every salon or small business except C corporations should send Congress a big thank you card for passing Section 199A. In general, with some exceptions, under this new section you are allowed to deduct 20% of your income. This applies to income from S corporations, sole proprietorships, LLCs, partnerships and even most rents.
This is not a deduction for Social Security or Medicare purposes but simply for income tax.
For example, in 2017 a salon/spa has income of $50,000 and is in a 25% marginal tax bracket. In 2017 the income tax on that portion of the taxpayer’s income is $12,500 ($50,000 x 25%)
Same situation except in 2018. Not only will the rate be lower, Section 199A allows taxpayer to deduct an additional $10,000 ($50,000 x 20%), so the income tax drops to $10,000 ($40,000 x 25%).
A word of warning. Because of some phase-outs, definitions and unpublished regulations, Section 199A can be a little complex. I recommend you meet with a competent tax advisor to maximize your tax savings.
Salon Today: You mentioned salons that are taxed as a C corporation do not get this break.
Kopsa: That is correct. Not only do C corporations not get to deduct 20% of their income like other entities, they also got a tax increase of 40% on their first $50,000 of income. This is the reason that we are meeting with all our C corporations to determine if they should file with the IRS to change their filing status to S. By changing to S from C they avoid the higher tax on the first $50,000 of income, and they qualify for the new Section 199A 20% deduction.
Salon Today: Any other goodies?
Kopsa: Yes, without going into a lot of detail:
- Family Leave Credit—For 2018 and 2019
- A 12.5% credit if wages are paid during a family leave.
- The 12.5% credit increases (not to exceed 25%) for each 1% of pay over 50%.
- Limited to 12 weeks.
- Faster deduction of equipment and lease improvements.
Salon Today: Anything else for business owners to look out for?
Kopsa: Yes, there are a few negatives:
- Business entertainment is a longer deductible.
- In the past, we could write off 100 percent of some meals for parties and events as opposed to 50 percent for most meals. This is gone.
Salon Today: Any quick tips for individuals?
Kopsa: There is a lot of information in the 1,001 page bill, but here are a few tips:
- A $2,000 credit for each child under 17. Up from $1,000 with a much higher phaseout.
- A $500 credit for other dependents.
- A more generous standard deduction. Up to $24,000 from $12,700 (12,000/$6,350 single)
- A change to the 529 Plans which in the past could only be used for post-secondary education.
Salon Today: Do you have any concerns?
Kopsa: Other than people not reviewing their situation to position themselves to take advantage of the changes, my concern would be that the IRS is in the process of issuing regulations on how they interpret the intentions of Congress. Sometimes, the IRS interpretations surprise us. In addition, Congress sometimes, in the heat of getting a law passed, has some drafting errors or passes a portion of the law with unintended consequences that they need to fix with technical correction legislation.
Salon Today: That is a lot to absorb. Any closing words of advice?
Kopsa: This is a little like doing hair. If a client wants her hair to look good after she leave the salon, you need to listen to a professional. Everybody’s hair is different and the professional can customize her advice on products and techniques so that the client looks her best.
The same is true with taxes. Everybody’s situation is different. A true tax professional will base their advice on the taxpayers’ unique situation. This is where a professional with knowledge of the new law can help keep Uncle Sam from getting too much of your hard-earned cash.
If you have questions about the new tax law, Larry Kopsa graciously offers his email. Please contact him at [email protected]
Check out the rest of the agenda for Data-Driven Salon Summit and purchase tickets at DataDrivenSalon.com.
The information contained in this article does not constitute the rendering of legal, accounting, investment, tax, or other professional services, but rather is intended as a means to inform you about current topics of interest. For additional information on this article or to sign up for Kopsa Otte CPA’s free weekly Salon and Spa Newsletter contact [email protected]