Tightening Lending Standards, Disappearing Deductions, and New Tax Breaks
Bank Lending Standards Expected to Tighten in 2019
This past Monday, the Federal Reserve revealed that many banks have gotten stricter with the underwriting of certain loans during the last quarter of 2018 and they expect loan demand and performance to decline in the months ahead.
According to a report in The Wall Street Journal, which sites the Federal Reserve, “Banks reported expecting to tighten standards for all categories of business loans as well as credit-card loans and jumbo mortgages. Meanwhile, banks anticipate that loan performance will deteriorate for all surveyed categories.”
Construction and land development loans in particular are seeing these changes take effect. 16 percent of banks have gotten tougher in terms of credit standard, while only 3 percent have made it easier to get construction and land development loans.
Looking to the year ahead, one-fourth of the banks surveyed said they think the delinquency rate on loans and charge-off in construction, land development, commercial and industrial loans will increase.
Source: https://www.pymnts.com/loans/2019/banks-loan-standards-decline/
Disappearing Deductions: Some Popular Tax Breaks May Be Missed This Tax Season
Small business owners may notice something missing as they compile their income tax returns this season: several popular business deductions have disappeared or been reduced under the new tax law.
Deductions for entertainment expenses, employee transit benefits, and what are called net operating loss carrybacks have all been removed by Congress. Accountants and tax attorneys suspect the break for entertaining clients and customers to be the most sorely missed by small business owners.
Here’s a closer look at the disappearing deductions:
Entertainment
Many business owners use entertainment to build and maintain relationships with clients, but the new tax law has done away with the entertainment deduction for businesses.
Silver lining: owners can still deduct the cost of taking a client out for breakfast, lunch, or dinner. Half the total bill for a business meal is deductible.
Interest
The new tax law has set a limit on how much interest businesses can deduct on their loans and credit lines.
There is currently no ceiling in place for the smallest businesses (those with up to $25 million in average annual revenue over the previous three years) but small businesses above that threshold must limit their deduction to 30 percent of their adjusted taxable income plus their interest income, if any.
Employee Expenses
Business owners can no longer take a deduction for subsidizing their employees’ commuting costs.
Employees also lost a popular deduction for job-related expenses (like the cost of tools, uniforms, publications and other work-related purchases).
Net Operating Losses
Small businesses that lose money will no longer have the option to “carry back” their losses to offset earnings in previous years and receive a refund on taxes they paid previously.
The absence of carrybacks is likely to be an issue for companies like restaurants and retailers (which may make money one year, lose money the next).
Brand-New 20 Percent Tax Break Available for Small Business Owners
Attention entrepreneurs: certain small business owners may be able to take advantage of one of the new features of the Tax Cuts and Jobs Act, which went into effect last year.
This new tax break allows owners of “pass-through” entities (sole proprietorships, S-corporations and partnerships) to deduct up to 20 percent of their qualified business income.
So who qualifies?
Entrepreneurs — regardless of industry — qualify for the deduction if they have taxable income that is under $157,500 if single or $315,000 if married.
Over that income threshold, the IRS places limits on who may qualify for the break.
Doctors, lawyers, accountants, and other “specified service trades or businesses” won’t qualify if their taxable income exceeds $207,000 if single or $415,000 if married.
A different set of rules applies to businesses that are not “specified service trades or businesses.” Those business owners may get a reduced deduction if their taxable income exceeds the $157,500/$315,000 bracket and is still below the $207,500/$415,000 threshold.
For companies that do not qualify as “specified service trades or business” with taxable income that exceeds the $207,500/$415,000 threshold, the deduction is generally capped as a percentage of W-2 wages paid to employees.
The IRS has also proposed additional guidelines for rental real estate owners and vacation properties.
How to proceed
This is a brand-new tax break, so business owners should be prepared for the possibility that the IRS could challenge their deduction. Here’s how to proceed:
Keep well-documented books and records
Think before adopting any aggressive strategies to qualify for the break
Talk to your accountant
Following these steps will help you determine whether or not you’re a good candidate to take this new deduction on your 2018 tax return.