The Tax Cuts and Jobs Act (TCJA) of 2017 has led to several recent shifts in the tax code. Don’t let the date throw you, as these changes impact finances for the 2018 calendar year.
The more you know about the changes before Tax Day hits, the better prepared you will be to make decisions that maximize your savings and minimize your expenses.
“You shouldn’t plan your business around taxes, but you should take note of the changes and take advantage of what you can,” explains Ed Slott, CPA, author of “Ed Slott’s Retirement Decisions Guide” and host of the public television program “Retire Safe & Secure!” “You may see some different results at tax time — some in your favor — and other outlays that are no longer deductible.”
Review the following list of TCJA tax rules to determine what steps you should take.
Flat Tax Rates
One of the most high-profile changes is the flat tax rate for businesses structured as C-corps. Before the TCJA, the tax rate for C-corps ranged from roughly 15-35 percent. Most C-corps will now have a lower tax bill. Personal service corporations — C-corps in which the owners perform a certain amount of service directly in particular industries — also get this flat rate.
If your business is structured as a partnership, an S-corp or a limited liability company (LLC), as most small businesses are, you will not be impacted by this rule change. Partnerships, LLCs and S-corps are all considered pass-through entities, since income is passed through the business to owners. Taxes are then calculated on this income as personal tax rates.
“The big tax savings from the new law went to the C-corps — typically the big corporations, but that does not mean you should change the form of your business,” explains Slott. “For one, the tax law is temporary, meaning these changes are set to expire after 2025, or maybe even sooner, when a new Congress takes a fresh look.”
If you operate a pass-through entity, the new law includes an additional deduction of 20 percent for any of your income that qualifies. Qualified income for this deduction is below $157,000 for an individual or $315,000 if married and filing a joint return.
Fine Print Excludes Professional Services Businesses
The pass-through deduction on qualified income excludes some professional services companies with particular levels of earning. If you are a business that operates based on the services of one person — physicians, lawyers, accountants, consultants, etc. — and your pass-through income exceeds $207,500 for individuals or $415,000 for people who are married and filing jointly, you may not take this deduction.
If your business structure is pass-through and you are not in a service business, the income that qualifies for the 20 percent break is based on the lesser of two calculations, either:
- 20 percent of your qualified business income or
- the greater of either half your W-2 wages or 25 percent of your W-2 wages plus 2.5 percent of your qualified property cost.
“I wouldn’t wade into these waters alone,” cautions Slott. “Congress created a morass of complexity with this tax change.”
Bye-bye to Business Deductions
Some go-to deductions for small companies are either changing or disappearing. They include:
- Loan interest: Businesses can now only write off interest expenses on business loans equal to the sum of the business interest plus 30 percent of a company’s adjusted taxable income. Previously, there was no such limit. Exceptions do exist, though, so talk to your tax advisor.
- Entertainment expenses: Money spent on client meals, gifts and entertainment has long been a prominent deduction for small companies. This deduction is going away. However, office parties held at your company location are still 100 percent deductible.
- Net operating loss: Before the TCJA, a business that operated at a loss could use it to reduce taxes owed for the previous two years or for upcoming taxes owed. Under the TCJA now, businesses can only use a loss to offset taxes owed in the future, and that loss is limited to 80 percent in any given year.
Deduction Increases for Business Property
Small businesses can expense more business property costs in most cases, due to changes in Section 179. The changes apply to actions taken after December 31, 2017, and will be reflected in 2018 taxes. Changes include:
- Immediate write-offs: Businesses can now start to claim depreciation for the year the property is first in service.
- Higher deductions: The maximum deduction rate on property has increased from $500,000 to $1 million.
- Expanded options: There is now an expanded definition of real estate that qualifies for deductions, along with a broadening of the definition of assets that qualify. One example of that expansion is film, TV and theatre items.
There are many details, exceptions and moving parts related to the TCJA rule changes for small businesses. Determine the TCJA’s impact on your small business by meeting with your tax advisor as soon as possible. He or she can help you see where you fit with the changes and potentially find other important rule shifts that impact what you will owe at tax time.