The 2017 tax reform legislation or TJCA impacted both individuals and businesses. We will explore some of the major changes to the tax code as it relates to corporations, S-corps, partnerships, LLCs and sole proprietorships.
Your business structure and accounting methods largely determine how these new tax laws will affect your business and ultimately your bottom line.
It’s the second filing season since the Tax Reform laws have passed. It’s always a great idea to plan ahead for your taxes so you are not giving the government an interest-free loan resulting in a huge refund or in contrast owe a substantial amount of taxes tying up your cash flow.
Many of the tax reform laws expire at the end of 2025 including the reductions to the individual tax rates and the small business deduction on qualified business income so keep this in mind when planning for taxes.
Here is an overview of some of the TCJA changes:
Corporate Tax Rate – No expiration
The corporate tax rate fell from 35% to a flat 21 percent of taxable income for tax years beginning after December 31, 2017. A corporation with a fiscal year that includes January 1, 2018, will pay federal income tax using a blended tax rate and not the flat 21 percent tax rate under TCJA. There is no expiration on this law change.
Corporate Alternative Minimum Tax
TCJA repeals the corporate alternative minimum tax (AMT) for years beginning after December 31, 2017.
Qualified Business Income Deduction or Section 199A
Pass-through entities (S-Corps, Partnerships, LLCs, Trusts) and Schedule C filers may be eligible for up to 20% deduction of their qualified business income. The deduction is available for tax years beginning after Dec. 31, 2017.
Qualified business income includes domestic income from a trade or business. It does not include employee wages, capital gain, interest, and dividend income.
The deduction is generally available to eligible taxpayers whose taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers. Taxpayers may claim the deduction in addition to the standard or itemized deduction.
There are 3 exceptions to the QBI deduction:
- A trade or business conducted by a C corporation.
- For taxpayers with taxable income that exceeds the threshold amount, specified service trades or businesses (SSTBs). An SSTB is a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.
- The trade or business of performing services as an employee.
The exception does not apply to professional service business with taxable income below the threshold.
Business Interest Expense
There is a limit on the interest expense deduction to 30% of the business earnings before interest, taxes, depreciation, and amortization if gross receipts are in excess of $25M.
Meals and Entertainment Deduction
(TCJA) amended the deduction for business meals and entertainment under IRC §274. Business entertainment, amusement and recreation expenses are generally no longer deductible.
Business Meals continue to be deductible by 50% of the cost of the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.
Food and beverages provided at entertainment events will not be considered entertainment if purchased separately from the event, or stated separately from the cost of the event on one or more bills, invoices or receipts.
Qualified Moving Expense Reimbursement
Employers must include moving expense reimbursements in employees’ wages for the tax years 2018 through 2025. TCJA suspends the exclusion for qualified moving expense reimbursements.
The one exception to this new law is Active duty Members of the U.S. Armed Forces who have a military order to move to a permanent change of station. If the moving expenses were not reimbursed then it would qualify as a deduction.
New Depreciation Rules
Businesses can immediately expense more of their business assets under TCJA. You may still elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The TCJA increased the maximum deduction from $500,000 to $1 million.
It also increased the amount at which the deduction begins to phase out from $2 million to $2.5 million. For taxable years beginning after 2018, these amounts of $1 million and $2.5 million will be adjusted for inflation.
TCJA modifies the definition of section 179 property to allow taxpayers to elect to include certain improvements made to nonresidential real property, including most improvement to a building’s interior, plus roofs and systems for heating, air conditioning, security, and fire protection.
The TCJA also removes computer or peripheral equipment from the definition of listed property. This change applies to property placed in service after December 31, 2017.
Net Operating Losses
A business may have a net operating loss if its deductions for the year are more than its business income. TCJA limits the NOL deduction to 80 percent of taxable income for the year rather than allowing the loss to offset 100 percent of the deduction of 100 percent of the taxable income.
Also, most businesses can no longer carry back their NOLs to the prior two tax years as was allowed under prior law. Now, a business may carry forward an NOL indefinitely, rather than expiring after 20 years as was the case under prior law.
Employer Credit for Paid Family and Medical Leave
TCJA added a new employer credit for paid family and medical leave. This is a general business credit that qualified employers may claim, based on wages paid to qualifying employees on family and medical leave, subject to certain conditions.
Employers must have a written policy in place that meets certain requirements, including providing:
- At least two weeks of paid family and medical leave (annually) to all qualifying employees who work full time (prorated for employees who work part-time, and
- The paid leave is not less than 50 percent of the employee wages.
The credit applies to wages paid in taxable years beginning after December 31, 2017, and before January 1, 2020.
Only paid family and medical leave provided to employees whose prior-year compensation was at or below a certain amount qualify for the credit. Generally, for the tax year 2018, the employee’s 2017 compensation from the employer must have been $72,000 or less.
Tax credits reduce your tax liability dollar for a dollar whereas a tax deduction reduces how much of your income is subject to taxes. Deductions lower your taxable income by the percentage of your highest federal income tax bracket. For example, a tax credit valued at $2000 lowers your tax bill by $2000. Tax deductions of $2000 with a tax bracket of 20% only reduces your tax bill by $400.
You definitely want to keep your books and records up to date and accurate so you can take full advantage of tax credits and deductions during the tax filing season. If you need help with this, we are ready to assist you. Not only does tracking your finances enable you to make better business decisions it also makes the tax preparation process a lot easier. Contact us today!
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