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*Pass-through** tax treatment means that the taxes of a business are "passed through" to the tax return of the individuals owning the business.
Pass-through businesses include:
• Sole proprietor and single-member LLC businesses filing a Schedule C to report their business income,
• Owners of partnerships multiple-member LLC's and S Corporations filing their share of business income on Schedule K-1.
Two types of businesses are **_not_** pass-through businesses: corporations and LLC’s electing to be taxed as corporations. Taxes for corporations aren't passed through because corporations are separate entities from their owners. Pass-through status also means that these business entities are not subject to double taxation, as are corporations.
**Changes to Pass-through Taxes Effective in 2018**
Beginning in 2018 (for 2019 taxes), a deduction of 20% of "qualified business income" (QBI) can be taken. Qualified business income is tied to the owner's investment in the business, either in wages paid to employees or investment in capital assets bought and used in the business. Capital assets could be a business car, equipment, or furniture.
The calculation for this QBI deduction is complicated. Kelly Phillips Erb at Forbes has more details on how the calculation for this 20% deduction would work. She also points out that the deduction doesn't affect your ability to take deductions on business expenses on your business tax return.
The deduction will be phased out for service professionals (professions like accounting, law, health care, and others) once their income reaches $157,500 for singles and $315,000 for joint filers. This standard deduction will end after 2025.
**How Pass-Through Taxes Work**
Because the taxes of the business are passed through to the owners' tax returns, the business profit is taxed at the individual owner's personal tax rate, rather than at the corporate tax rate. This difference may result in a lower - or higher - tax rate for the business, depending on the tax rate of the individual taxpayer.
**Pass-through taxes work in two steps for these businesses:**
**_Step One_**: The business calculates its net income (gross income minus deductible expenses). The calculation may be on a tax return (for partnerships and S corporations) or on a schedule on the person's tax return (for single-person businesses).
_**Step Two**_: The business owner includes their share of the net income of the business on their personal tax return. For a single-person business, the tax is figured on the owner's entire net income. For multiple-owner businesses, the tax is divided among the owners.
The 20% deduction for pass through businesses can amount to substantial tax savings for many small to medium sized businesses. For more information about pass through taxes, you can read the full article here. Disclaimer: Of course this article is only meant to introduce the concepts of pass through taxes and requires further investigation for each individual. Before making any important tax decisions always contact your accountant or tax professional for assistance.
**Pass-through Taxes for Sole Proprietorships and Single-Member LLCs**
In a sole proprietor business, the business and the business owner are not separate, from a tax standpoint. The business tax filing is part of the business owner's personal tax return. So the profits or losses are calculated on Schedule C of the owner's personal 1040 and the net income or loss is passed through to Line 12 of Form 1040, for the owner.
Single-member LLC’s pay income tax in the same way as sole proprietorships, so income tax is passed through to them in the same way.
**Pass-through Taxes for Partnerships, S Corporations and LLC's**
In other types of businesses that are not corporations, the tax liability (the net income) of the business is passed through to the owner's personal tax return in a different way for each.
For **partners in a partnership**, the net income (profit) of the partnership as a whole is calculated. Then, this income (or loss) is divided among the partners according to their distributive share, as set in the partnership agreement. Each individual partner receives a Schedule K-1, which shows their share of the profit, and which is included in the person's Form 1040.
Members (owners) of a **multiple-member LLC** are taxed as partners, so they would receive a partnership K-1 based on their share of the profits of the LLC.
In the same way as the partnership, **S-Corporation owners** also receive a Schedule K-1 showing their share of the profits of the S corporation for the tax year.
**Pass-through Taxes and Self-employment Tax**
Self-employment taxes (Social Security and Medicare tax for self-employed individuals) also pass through to business owners. The amount of self-employment tax is calculated based on the business owner's net income, and it is passed through to the individual income tax return to be paid. As with pass-through income tax, self-employment tax is not paid by the business, but by the individual, since it relates to the individual's Social Security and Medicare benefits.
_**Disclaimer: This article includes a general discussion of pass-through taxes, and it's not intended to be tax or legal advice. Every business tax situation is unique; before you prepare your business taxes, discuss your tax situation with a tax professional.**_
SMALL BUSINESS ACCOUNTING TRENDS 2018
In 2017, small business accounting continued down its righteous path to the cloud, increased industry automation, and stretched its integration muscles. This lessened the daily workload of business owners and gave accountants more time to focus on the important stuff, like forecasting and consulting.
As we move into 2018, accounting will continue down many of the roads it traveled in 2017 while branching into a few new areas as well.Today, we’ll look at the small business accounting trends that will define 2018.
Here are the biggest accounting trends for the coming year paired with analysis on what they mean for your small business.
Automation will continue to reduce paperwork. Most of the automation work in accounting circulates around OCR (optical character recognition) technology, which scans a physical document and spits out its contents in a digital format.
When you take a picture of your receipt, OCR processes the image, pulls the numbers and writing out, and generates structured data on the back end. Another way to think of OCR is as the box cutter that opens up the data container. Once the box is open, tools like AI and machine learning go to work on the data to generate something valuable.
Two things are happening right now that are making automation even more valuable:
OCR is getting faster and faster. This means images scanned into your system can be converted into data faster, allowing closer-to-real-time processing and use.
What it means for small businesses
Automation is great for compliance and is getting better at categorization. I predict that by the end of 2018, you’ll be in a place where you’re almost never required to fiddle with expenses through manual entry or categorization. Xero, QuickBooks, and expense management software brands like Expensify have already begun implementing this.
The goal is managing by exception. If you buy something at Starbucks, the software can scan the receipt and know which bucket to throw it in. You’ll never have to look at the expense after it’s incurred.
If you make a run to Walmart, the system might flag it to make sure you don’t need to split the expense or toss it in a new bucket. Such expenses should be the exception to the rule, letting you reclaim valuable working hours.
Your accountant may charge you a new rate This one made the list last year as well. Everyone is benefiting from the time accounting and expense management software is freeing up, including your accountant.
With that free time, accountants are moving toward a consulting role. This means that they’re providing real value for your business, not just ticking boxes and filling out forms.
Compliance used to be a huge part of your accountant’s day. For all the tagging and organizing you do, there were always things for your accountant to straighten out or put in the right place. As software gets smarter, the slog through this type of work lessens. Your accountant can now spend time actively working to make your business better. They can recommend investment strategies, help forecast expenses and revenue, and give general business advice. Expect the change in focus to come with a change in billing. Instead of being charged for filing your taxes or a small, singular task, more accountants will charge a recurring fee for acting as a consultant.
What it means for small businesses
The implication here is clear: you’ll pay a different amount to your accountant and receive a different output. I think this is great for small businesses. Technology is making business-accountant relationships possible again, which means your accountant could move from being a cost to a source of revenue or increased profits. Expect an adjustment period, during which you’ll define the new role your accountant plays. It’ll all work out in the end.
Financial data will be better visualized One of the biggest problems with financial data is that it’s incredibly boring. I actually think this is one of the reasons so many small businesses fail. You get to the end of a month, and what do you have to do? Look at a table of numbers and some weird expense buckets.
Looking at rows of data as the default is insanity when 65% of people are actually visual learners. Shouldn’t we be looking at charts and trend lines? Well-visualized data makes the world go ’round and helps business owners make better decisions.
I didn’t just figure this out on my own. Plenty of others in the small business space are also trying to make data easier to consume and interact with. In 2018, we’ll see more built-in and standalone options for viewing your financial data. The strongest versions will allow you to use visualization to play with forecasts and budgets. At QuickBooks Connect this year, I saw some great work from LivePlan, which is doing a lot with data visualization.
What it means for small businesses
This means better decisions and less reliance on someone else to tell you what’s working and what isn’t. Of all the trends listed here, I think better visualization is the one most likely to change the small business world. Giving people more certainty about their choices means they have a higher chance of getting it right. This decreases major mistakes and leads to fewer companies slowly sliding out of existence.
Find a visualization tool that works for you, or start using new accounting-specific tools as soon as they’re available in your accounting software of choice. These are the top accounting trends I’m looking for in 2018, but they’re not the only ones out there. What are you looking forward to in the coming year?
It's no surprise that video marketing is a huge trend. Just glance through social media feeds to see evidence of video marketing's popularity and growth. It's a proven digital content format that engages customers and prospects. Plus, video marketing is easily accessible and user-friendly, thanks to the proliferation of mobile devices and faster internet.
Even so, many businesses have avoided video marketing because they don't think they can afford it. In previous generations, it was expensive and time-consuming to produce a video of virtually any type.
But technological advances in video production, including easy access to sophisticated video tools and resources, have made marketing videos truly affordable, even for solo entrepreneurs. For those who don't want to go it alone, these same advances have led to the launch of many companies that specialize in creating cost-effective video content for almost any size of company.
One of the best ways to start is to create an explainer video. This type of video marketing content is designed to promote your company's products or services and how they work in less than three minutes.
Here are eight tips to ensure your explainer video is the best it can be.
1. Watch videos. Get inspired by viewing explainer videos that others have created, whether in your industry or not. Watch your favorite videos multiple times to dissect essential elements. Observe elements such as topics covered, the story and how it was shared, action versus static shots, lighting, angles, single or multiple cameras, voice-overs, music, and graphics.
2. Plan to tell a story. Explainer videos are a digital form of storytelling, and all good storytellers start with a concept. Consider showing a problem many of your customers share, and then show how your product or service solves it. You could also tell the story of how and why your company started. If your service approach or manufacturing process sets you apart in the marketplace, create a video that takes customers behind the scenes to show them how you deliver your product or service. An explainer video is also ideal for products that need to be demonstrated to be appreciated.
3. Keep it simple. Choose one storyline per video. This is not the time to showcase your entire product line. Think elevator speech. Be concise. Share that one story in less than three minutes – one minute if you can. Refrain from using lots of props or complex sets.
4. Create a compelling opening introduction. The entire video must create interest and excitement, and that starts with the first few seconds. As you plan your script, keep in mind that you must instantly capture and hold viewer interest. If you fail to do that, a large percentage of your video's viewers will click off in 10 seconds.
5. Focus on the product's mission. Stay away from droll footage about the product's virtues. Instead, spend those precious minutes showing how the product benefits your customers by solving a common problem. Avoid overt sales pitches. Appeal to your customers' emotional needs and desires. Ideally, your explainer video should be an extension of your brand voice, tone and style. Don't be boring. Consider adding music to set the mood.
6. Decide where the video will live. Since more people every year are consuming videos via mobile device, it's crucial to create a video that displays well on mobile devices. Once your video is complete, you can put it up on YouTube, embed it on your website's homepage, link to it in emails, feature it on social media, put it up on a campaign landing page, and use it within sales presentations.
7. Invest in DIY gear. Most late-model DSLR cameras can shoot high-definition video or better, and many of the latest mobile phone models have similarly high-quality video capabilities that are suitable for creating online video content. Video editing applications, royalty-free music, and other tools and resources are easily available too. If you're using a mobile phone, you'll also need either a tripod that is specifically for mobile phones or a mobile phone head for a standard photographic tripod.
8. Or hire professionals. It takes practice to bring your vision to life. If you're not ready to invest in a learning curve, hiring professionals is a good option – especially because video pros are more affordable than you might think. A simple Google search for "marketing video production" will turn up a long list of professionals who can help, including those who specialize in working with entrepreneurs and small businesses. Be sure to view their work samples and check their references before hiring them.
Story by Pamela Oldham,
Business News Daily