UCM’s Recap of the Recently Passed Tax Cuts and Jobs Act for Business
In December 2017, President Trump signed into law the Tax Cuts and Jobs Act (“Tax Act” or “Act”), which introduces the most significant changes to the U.S. tax system since 1986. With a few exceptions, the provisions are generally effective starting in 2018.
Although the Tax Act may provide simplification in a few aspects by eliminating tax provisions, there are also added complexities. Due to the number of changes, as well as some new concepts introduced in the law, there is a need for guidance from the Internal Revenue Service (IRS), and possibly from Congress in the form of technical corrections, on the final application of the law. Timing of this guidance and any technical corrections may take months. Which states will conform and to what extent those states conform with the federal changes adds to the complexities.
Given the magnitude of the tax law changes, many planning strategies will need to be studied and evaluated to assess whether they still make sense. Minimizing taxes is all about planning ahead and knowing the rules, so we at Updegrove, Combs & McDaniel would like to remind you that we are available to assist your business with this effort.
What are some of the significant changes for business taxpayers?
Below are some highlights of the significant changes to businesses. As this information is general in nature, it is not intended to address all the Tax Act changes that may impact your business.
Tax rates: The Tax Act introduced a major change, which is the reduction of the corporate tax rate to a flat 21%, effective 2018. For fiscal year corporations that begin during 2017 and have their fiscal year end in 2018, Code Section 15 provides an alternative way to calculate the taxes that, in effect, provides a blended tax rate.
Deduction for pass-through businesses: The Tax Act has a new provision that provides up to a 20% deduction on qualified business income (“QBI”) for business entities that do not pay income tax at the business entity level, but where the profits and other income of the business go to or “pass through” to the owners (or to the beneficiaries in the case of a trust). The calculation is very complex and can be limited based on taxable income as well as the type of trade/business income that is applicable. More guidance is still needed on the final application of the law related to this new deduction.
Corporate AMT: Alternative Minimum Tax (AMT) for corporations has been repealed.
Net Operating Loss (“NOL”) provisions: For 2018 and forward, except in certain situations (specific farming losses, for one), the Tax Act has repealed the two-year carryback. The NOL carryforward period, however, is indefinite, but only 80% of taxable income can be reduced by the NOL.
Entertainment expenses/fringe benefits: The Tax Act provides that no deduction will be allowed for entertainment expenses (whether directly related or associated with a trade or business). Taxpayers may still generally deduct 50% of business meals associated with operating their trade or business if they are traveling for work, but more guidance is necessary on what this will mean for meals that are not related to travel (taking clients out to lunch, etc.). The Act also made changes to the taxable nature of certain employee fringe benefits (e.g., qualified transportation, moving expenses, etc.).
Interest deductions: The Tax Act places new limits on the deduction for interest paid on business debts for taxpayers with average annual gross receipts > $25 million. Small businesses that have average annual gross receipts < $25 million are exempt from the limitation. For businesses subject to the interest limitations, there may be some additional planning needed to address debt financing decisions. Special rules apply to the calculation of income for Personal Service Corporations and S Corporations.
Depreciation: Several modifications to the depreciation rules were addressed in the new Tax Act and not all of them are noted in this communication. One notable change, however, is that the Act permits full and immediate expensing (“bonus depreciation”) up to 100% of the cost of qualified property placed in service beginning September 28, 2017 and before January 1, 2023. Qualified property available for bonus depreciation now includes “used” property that is acquired. One other notable change is that the Act expanded the definition of property subject to Internal Revenue Code (“IRC”) Section 179, as well as increased the limitation to $1 million and increases the phase-out threshold to $2.5 million for property placed in service on or after January 1, 2018.
What should businesses consider doing now to prepare for the anticipated impact of the Tax Act changes?
Many of the tax reform changes are complex and may require certain businesses to plan and reconsider some important issues including, but not limited to, choice of entity, debt financing decisions, changes to employee benefits, as well as decisions to lease or buy equipment. For example, if you fall into any of the following categories: are self-employed; operate as a sole proprietor; have a partnership, LLC, or S Corporation; or you have rental income, there may be opportunities to reconsider choice of entity structure to maximize the new deduction for qualified business income of pass-through entities.
As such, we are strongly encouraging our business clients to have tax planning done this year to assess how the Tax Act will impact their business and to take advantage of available tax planning strategies.
If you would like our assistance with your company’s tax planning needs to help you anticipate how the new tax laws will affect your tax situation, please contact us. We look forward to helping you navigate these changes.