A Guide to the New Tax Laws for Creative Agencies in the U.S.

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“Ah, those sweet, sweet taxes…” said no one ever! We all understand why we pay them, but it doesn’t mean we have to like it. If you live in the U.S., new tax laws for creative agencies just got a major overhaul. Actually, scratch that. Tax laws for every single business and individual got a major overhaul.

This post will teach you what the new tax laws are, what they mean for creative agencies, and how agency owners can keep more of their hard-earned cash where it belongs — in their pockets. Ready?

A Quick Primer On New Tax Laws for 2018

In 2017, the American government passed what’s known as the Tax Cuts and Jobs Act as a way to simplify the year-end tax filing process and stimulate the country’s economic growth. There are a few significant changes, both for individuals and businesses, that Americans need to be aware of.

Here’s what agency owners and their employees can expect regarding their individual taxes:

Standard Deductions Go Up

Individuals will be delighted to realize that the standard deduction has increased considerably — nearly doubling from $6,350 for a single person and $12,700 for a married couple filing jointly in 2017, to $12,000 for a solo taxpayer and $24,000 for a couple joint filing this year.

Those who are elderly, blind, or have a disability are eligible for even greater deductions of either $1,600 or $2,600 extra depending on their filing status.

Out With Itemized Deductions

While standard deductions have taken a giant step in taxpayers favor, itemized deductions have not. In fact, many of them were eliminated altogether. For example, moving expenses, even when relocating for work to a city over 50 miles away, are no longer deductible

Other itemized deductions were adjusted rather than eliminated such as state and local taxes, which now have a cap of $10,000 regardless of filing status. The previous tax law didn’t have a cap.

Finally, it should be said that popular deductions like those for a student loan and investment interest, teacher’s out-of-pocket expenses, and capital gains for the sale of a primary residence remain unchanged.

Adjusted Tax Brackets and Income Rates

Let’s talk tax brackets and income ranges because those have gotten an overhaul as well to account for inflation. The chart below illustrates the new figures compared to the old ones.

Table outlining tax rates of the US in 2019

Tax Law Changes for Businesses

Here’s what agency owners can expect regarding taxes for the businesses they proudly own and operate:

A Different Corporate Tax Rate

Under the old tax law, corporate tax rates ranged from 15% to 35%. Things are different now. In 2018 and beyond, the rate is set at a fixed 21% for all C corporations. Depending on which category your business fell into previously, this is either great or depressing news.

It’s also worth noting that this change is permanent. Many of the other tax laws are only set to last till 2025 when congress will again vote to keep or remove them. But this new corporate tax rate is here to stay.

Benefits to Pass-Through Businesses (Maybe)

A pass-through business is a business where profits pass through the company directly to the owner. Most S corps, partnerships, and sole proprietorships fit this mold. Typically, owners of pass-through businesses pay traditional income tax on their personal tax returns.

Under the new tax laws, pass-through business owners will be eligible to deduct up to 20% of the net income from their businesses. The only bad news? This deduction is only available for businesses that meet certain criteria.

Income and business type both play a factor in whether or not you’ll qualify for this deduction. Those making less than $315,000 a year and filing jointly, or $157,500 and filing solo probably shouldn’t have trouble qualifying for the entire deduction.

Those who make more than these figures, especially if they own a service business, will likely only qualify for a portion of this deduction — if they’re able to get it at all.

Say Goodbye to a Few Key Business Deductions

A few deductions that many business owners have taken for years will no longer be available. Most notable among them:

  • Entertainment Expenses: Have you ever bought sporting event tickets and given them to clients to increase goodwill? If so, you know that in the past the cost was 50% deductible. Not any more. You’ll now have to entertain your clients without receiving any kind of deduction for your troubles.
  • Business Interest: Under the old tax law, businesses could usually deduct interest paid on business loans. Interest on business loans is still deductible, but only if it’s equal to 30% of the business’ adjusted taxable income. This means that companies financing their operations via debt might need to rethink their strategy.
  • Net Operating Loss Deduction: The new tax laws change the options a company has when reducing taxes through net operating losses. Before, if your business recorded a loss, taxes owed for the previous two years could be reduced. Now net operating losses can only be carried into the future and are capped at 80%. For example, a $10,000 loss in 2017 can only be used to reduce taxes by 80% (or $8,000) for 2018 and beyond.

How the New Tax Laws Will Affect Creative Agencies

So what does this all mean for creative agencies and the folks that own them? The answer to that question is the ever-infuriating “it depends”. What kind of business do you own? A C corp, sole proprietorship, something else?

The type of business entity you own and operate will determine which tax credits and deductions your organization is eligible for.

Like we mentioned earlier, C corps now pay a flat 21% on all taxable income. The majority of businesses falling into this category will either see no significant differences between last year’s and this year’s taxes because they generally dole out bonuses at the end of the year and are therefore not taxed much at the corporate level, or will pay much less in taxes than previous years.

Those operating pass-through businesses may now be eligible for a 20% deduction of qualified business income. Again, the basic parameters are business owners making less than or equal to $315,000 a year when filing jointly, or $157,500 when filing individually. Business owners making more than this — especially those that operate service-based businesses — may only be eligible for a portion of this deduction or not at all.

Ultimately, how these new tax laws affect your creative agency depend on the kind of business entity it is and how much revenue it generates. But in general, most experts agree that the Tax Cuts and Jobs Act is favorable to businesses and will benefit the U.S. economy.

3 Tips to Keep More Money In Your Business

Now that you have a basic understanding of what the new tax laws are and how they affect creative agencies, you may be wondering what you can do to keep more of your hard-earned money in your own pocket. Here are three tips:

1. Build Your Knowledge Base

This article has hopefully been value-packed and beneficial to you. But it only provides a surface level understanding of the new tax laws and how they may affect your creative agency. You should take time to dive into the Tax Cuts and Jobs Act yourself to really learn its inner workings.

Or, at least, meet with an accountant you trust and pick their brain regarding the new tax laws. Knowledge is power and knowing more about how your company will be taxed now and in the future will benefit you greatly.

2. Get Creative

Savvy business owners will find ways to get creative and reduce their annual tax bill. For example, you could take advantage of the Augusta Rule, which states that a person in the U.S. can rent their home for 14 days or less without paying taxes on the income generated.

This gives business owners the potential to rent out their home office to their business for up to 14 meetings a year and pocket the revenue tax-free.

Also, many businesses will take a financial hit now that entertainment expenses are no longer deductible. But what if your courtside seats could be reclassified? Perhaps you could work with an entertainment provider and agree to sponsor the team for a specific amount each month. In return, your business would receive tickets and other perks.

Now, we must caution you, the IRS isn’t stupid and we definitely do NOT support breaking the law or any shady dealings. But we also know you work hard to make a living and would love to see you keep more money in your pocket.

So get creative, but be smart. Run ideas by your accountant and get their take on them. If a strategy is legitimate, give it a try!

3. Work With a Tax Strategist

Finally, we recommend you work with a tax strategist, not just an accountant. What’s the difference? Your accountant helps you during tax season. He or she takes all of your bookkeeping information and uses it to fill out the necessary forms and keep you on the government’s good side.

A tax strategist, on the other hand, is someone that works with your business throughout the year and helps you develop and implement strategies to save on your tax bill. These people often have the experience and knowledge of an accountant, but help you strategize for deductions rather than just recording the ones you’ve already qualified for.

The New Tax Laws for Creative Agencies

Tax laws are changing for U.S. based business owners. The information shared in this blog post will get you started on the path towards understanding what these changes are and how they’ll affect your creative agency.

We encourage you to study up and gain a firm understanding of the Tax Cuts and Jobs Act. The knowledge will benefit you in the form of more deductions and lower tax bills at the end of each year.

And don’t forget, a little creativity and partnering with an experienced tax strategist are also great ways to get ahead of the tax game and reduce what you owe. Good luck!

April 2, 2019