What the New Tax Plan Means for Your Business
February 5, 2018 by Lauren Debay, CPA
The new tax laws passed in December 2017 are complicated and make several very substantial changes to the laws affecting businesses. Small- and medium-size businesses, especially pass-through businesses, (about 95 percent of all U.S. businesses) are particularly favored. But corporations also have tax relief coming their way, and all businesses will see some well-loved deductions and credits limited or eliminated. As it stands right now, here are eight things business owners need to know about how the new tax law will impact their livelihoods and their taxes going forward.
1) Pass-through business income (from sole proprietorships, partnerships, S corporations, and some LLCs) will earn a deduction based on the owner’s qualified business income (QBI), which will generally be equal to 20 percent of QBI. The deduction applies to individuals, estates and trusts, but generally not to service businesses including many professional practices, although applicable income thresholds may apply. For example, joint filers with income below $315,000 and single filers with income below $157,500 can claim the deduction on income from service businesses, through December 31, 2025, when it expires.
Keep in mind that at higher income levels restrictions kick in; the deduction is not to be used when calculating the owner’s adjustable gross income; and fairly complex W-2 wage limitations also may apply.
2) C corporations and personal service corporations will now be taxed at a flat rate of 21 percent.
3) The new law repeals the corporate alternative minimum tax (AMT) for tax years beginning January 1, 2018. Taxpayers with AMT credit carryovers may claim a refund amounting to 50 percent of remaining AMT credits in tax years 2018, 2019, and 2020, and a refund on any credits in 2021.
4) Medium-size businesses may now be eligible to use cash method accounting, allowing for more flexibility, and many may be relieved of accounting for inventory under code section 471. Instead, these businesses will have the option to account for inventories as nonincidental materials and supplies, or may use the method that conforms to their financial reporting.
5) Business asset depreciation and expensing rules are also changing. The Section 179 expensing cap is doubled from $500,000 to $1 million; the first-year bonus depreciation percentage is doubled from 50 percent to 100 percent (assuming qualifications are met); and the depreciation deductions for business passenger vehicles are increased considerably starting in year two:
- Year 0ne —$10,000 (was $11,160 for a new car)
- Year Two — $16,000 (was $5,100)
- Year Three — $9,600 (was $3,050)
- Year Four and until fully depreciated — $5,760 (was $1,875)
6) The business interest deduction for both corporate and non-corporate entities will now be limited to 30 percent of earnings before interest, taxes, depreciation, and amortization for four years starting after Dec. 31, 2017, and 30 percent of earnings before interest and taxes thereafter. Amounts that cannot be deducted in a tax year may be carried forward indefinitely. Exceptions apply to taxpayers who have $25 million or less in average annual gross receipts for the preceding three tax years.
7) Rules for two well-known loss deductions will be stricter:
- The taxable income offset for net operating losses is now generally reduced from 100 percent to 80 percent. In addition, net operating losses (with farming exceptions) can no longer be carried back, but may be carried forward up to 80 percent. For non-corporate entities, a new limitation applies to deductions for excess business losses and should be discussed with your tax accountant.
- Deductions for business entertainment expenses are completely eliminated, as are many deductions for employee transportation and related fringe benefits like van pooling and mass transit passes. The latter, however, remain tax free for employees that receive them.
8) Like-kind exchanges under Section 1031 will no longer be allowed for personal property assets, only for real estate. There is an exception for exchanges that completed one leg before Dec. 31, 2017, and one leg remains incomplete.
These are highlights of just a very few tax law changes in the Tax Cuts and Jobs Act that could impact your business. As our tax specialists sort out the nearly 500 pages of the new law, we will continue to keep you informed. Meanwhile, if you have questions or concerns, Gordon Advisors has skilled tax specialists standing by to help so please contact us today.