The new tax reform law passed in December of 2017 (the “Tax Cuts and Jobs Act” or TCJA) is the biggest overhaul of the federal income tax code since 1986. It will have huge effects on business owners in 2018 and beyond. In fact I would argue that this is the biggest tax cut for the largest number of business owners in my lifetime. This special report covers the main issues of the new tax law affecting business owners.
- The new tax law dramatically reduces regular corporation (“C corporations”) will now pay a flat rate of 21%. This is down from a maximum rate of 35%. Warning: Check with your tax planner before you decide to convert your business to a “C corporation”. Double taxation of the earnings from a “C corporation” almost always results in a higher tax bill.
- Many business owners will qualify for a new 20% deduction. They can generally deduct 20% of “qualified business income" (in effect, you are only taxed on 80% of your business income). This is a great break for small business owners, but it is also one of the most complex changes in the new law. There are many restrictions designed to limit gaming the new rule. The break also phases out for higher earners in professional service firms such as accounting, health care, law, consulting, and financial services with taxable incomes in excess of $315,000 for joint returns and $157,500 for all other taxpayers.
- Business losses on individual returns are capped at $500,000 for couples and $250,000 for all other filers. The excess can be carried over.
- Net operating loss can offset only 80% of taxable income and net operating loss carrybacks are generally prohibited.
- Businesses can write off 100% of the entire cost of qualifying assets that they bought and placed in service after September 27, 2017. The deduction applies to either new and used assets with lives of 20 years or less.
- The maximum depreciation for qualified assets under Section 179 increases to $1 million (from $500,000). The deduction expires dollar for dollar once more than $2.5 million in assets are placed in service for the year.
- Property eligible for expensing now includes depreciable assets used predominantly to furnish lodging. Examples are furniture and appliances used in hotels, apartments, and rental homes.
- Commercial buildings can now expense roofs, HVAC equipment, fire protection, and security systems. This area is now much more complicated and you should contact a qualified tax planner.
- The annual depreciation caps for passenger vehicles placed in service (for the amount not deducted under the 100% bonus depreciation) is increased to $10,000 for the first year, $16,000 for the second year, $9,600 for the third year, and $5,760 for remaining years.
- Buyers of SUVs (new or used) with a gross weight over 6,000 pounds can write off up to 100% of the cost. You can also expense 100% of the cost of heavy pickups if the cargo bed is at least six feet long.
- Separate depreciation rules for restaurant, retail, and leasehold improvements are gone. They have been consolidated under the grouping of qualified improvement property and subject to new depreciation rules.
- The corporate alternative minimum tax is eliminated.
- Businesses that provide paid family or medical leave to employees qualify for a new credit of generally 12.5% of wages paid for family and medical leave. This credit is only for 2018 and 2019.
- The domestic production deduction, which allowed the write-off of up to 90% of income derived from U.S. production activities, is eliminated.
- Business entertainment and country club dues deduction is eliminated.
- Meals provided on the premises of the employer are now also reduced by 50%.
- Sexual harassment settlement payments are not deductible if subject to a nondisclosure agreement.
- Attorneys can’t deduct litigation costs until the contingency ends.
- Qualified small businesses with inventories are no longer to use the accrual method unless they meet a $25 million sales test. This is up from $1 million.
- If you reimburse your employees for auto and other business expenses, you should switch to an “accountable plan” rather than a fixed fee amount. Employees can no longer deduct these on their personal returns unless they are reimbursed for actual expenses.
As you can see, I wasn’t exaggerating when I stated that this is the biggest tax cut for businesses in my lifetime. Many of the changes listed above will happen automatically to help you save. But if you own your own business, there are several very important choices you have to make to get the most out of this once in a generation opportunity to cut your tax bill. If you don’t do your planning now, you will lose those opportunities forever!
If you own a business, and you want to pay the lowest tax amount possible, you must meet with a CPA or Enrolled Agent who specializes in tax planning before the end of the year.