Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act provides numerous tax planning opportunities for business owners. The act was signed into law on December 22, 2017 and is a major overhaul on the U.S. tax system. There will be technical corrections acts and guidance to follow for this act which will have an impact on planning and preparing income taxes in 2018 and in the future. This is NOT a tax simplification act it is indeed a tax planning act. An overview of the major changes in act identifies some of the areas that will need to be analyzed and planned for to minimize your tax liability.
What is the new deduction for S Corporations, Partnerships and Sole Proprietorships?
Section 199a provides a 20% deduction for qualified business income received by noncorporate taxpayers. This includes Qualified Business Income of proprietorships, partners, S Corporation shareholders, REI dividends other than capital gain dividends, qualified cooperative dividends and income from income from publicly traded partnership that is not treated as a corporation. The deduction for most businesses will be the less of 20% of Qualified Business Income or the W-2 wage and capital limitation for each trade or business.
If you have a Specified Service Trade or Business which includes health, law, accounting, actuarial, performing arts, consulting, athletes, financial services or trade where principal asset is the reputation or skill of the employees or owners you are subject to phaseouts of the deduction based upon your income and filing status. Architects and engineers are excluded from this phaseout. The phaseout increases from $315,000 to $415,000 on a joint return and from $157,500 to $207,500 for others.
The complexity and phaseouts of this new deduction will provide an opportunity for tax planning to maximize the deduction you are entitled to.
What deduction did business owners lose in 2018?
The Section 199 domestic production provided a 9% deduction of qualified production activities income in 2017. This deduction was available to manufacturers, construction, engineering, architecture, computer software production and other industries.
What are the changes in depreciation?
There are a lot of changes to deprecation for business and real estate. The business depreciation changes include the ability to depreciation qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023 may be expensed 100% instead of the prior 50%. The Section 179 deduction has been increased to $1,000,0000 up from $510,000 allowed in 2017. Both of these methods of depreciation provide increased deductions starting in 2018.
What happened to my free lunch?
The write off for entertainment expenses has been eliminated when (1) the activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or (3) facility or portion therein used in connection with (1) or (2).
Examples of 100% deductible meals & entertainment: Year-end party for employees and spouses, golf outing for all employees and spouses, meals to general public for marketing presentations and team-building recreational event for all employees.
Examples of 50% deductible meals & entertainment: Employee meals for convenience of employer, employee meals for required business meetings, meal served at Chamber of Commerce meeting and meals while traveling away from home overnight.
What is the change in inventory and taxable income?
Businesses with gross receipts of $25 million or less are not required to use inventories. Inventories may be treated as materials and supplies.
What is the change in Corporation tax rates?
In 2018 C Corporations have a new flat tax rate of 21%. This means all income in a C Corporation is taxed at 21%. The dividends received deduction is reduced for C Corporations.
How can be on the cash basis of accounting?
The cash basis of accounting is for taxpayers with $25 million or less for the prior three taxable years regardless of entity structure or industry.
What are some of the changes for individuals?
There were numerous changes to tax for indivduals which includes:
- Tax rates were reduced and the top tax rate was lowered to 37%
- The standard deduction was increased to $24,000 for joint return or surviving spouse, $18,000 for unmarried with qualifying child and $12,000 for single filers.
- Personal exemptions were eliminated.
- State and local tax deduction limited to $10,000
- Mortgage interest limited to $750,000 of loan value.
- Miscellaneous itemized deductions are eliminated through 2025.
- Increase in the AMT threshold which will reduce the number of taxpayer’s subject to the alternative minimum tax.
How do I Minimize My Income Taxes?
This act provides planning opportunities to legally minimize the amount of taxes you pay in 2018 and in future years. It is very important to plan for these changes in 2018 to avoid wasting tax dollars. We will be working with our clients with the two strategy sessions that we believe is needed to get the legally minimize your income taxes with this new tax act.
Tax Cuts and Jobs Act – Structure Tax Planning for 2018:
We will analyze the structure of your business and how the changes in the tax code will require a change to the way you are structured. There are numerous factors to consider for business owners and we will work with you to capture the maximum tax savings available to you. This process will begin in May 2018 to ensure the proper structure is in place for your business.
Strategic Tax Planning for 2018:
We will analyze your business operations based upon the changes that have been implemented in September 2018 and determine what additional strategies needed to be implemented or altered to get the most out of this act. We will then follow-up in November 2018 as needed for any end of the year adjustments.
This is designed to be an overview of the new tax act for educational purposes and does not contain every provision in the act and is not legal or tax advice for your specific tax situation. Properly applying the provisions in the Tax Cuts and Jobs Act requires planning for your individual situation to ensure you are complying the law. There will be updates and changes that may not be incorporated into this article.
We have been actively tax planning for our clients for over 20 years and we have the experience and planning tools to minimize your tax liability. To learn more about how we can assist you minimize your tax liability schedule your tax review.
Do not implement tax planning based upon the information contained in this article without consulting with your tax professional on your particular situation. Changes and updates will occur and this article may contain some information that is not current.