The Tax Cuts and Jobs Act (H.R. I; the Act) provides for major changes to business tax law. Most of the changes are effective January 1, 2018. The majority of the business provisions do not expire.
The following are a few changes that may save you significant tax dollars this year and in future years:
- C-corporations: Are now subject to a flat tax of 21% and the special tax rate for personal service corporations is eliminated.
- Small business deduction: Probably the most revolutionary addition to the tax law is the new deduction for qualified business income from “pass-through entities,” which also applies to sole proprietorships and rental properties. This provision can provide a deduction of up to 20% of your net “qualified business income”. This new law is too complicated to discuss in this email, but if you are self-employed or have a partnership, LLC, S corporation; you operate as a sole proprietor; or you have rental income, then we should talk further to plan your income and deductions to maximize this new deduction.
- Increased expensing: The Act allows up to 100% of newly-acquired assets to be deducted in the year purchased, rather than depreciating them over the life of the asset. This change is retroactive to September 28, 2017, so we can fully deduct new or used assets purchased on or after that date. Previously, used equipment purchased for your business was not eligible for special bonus depreciation rules, but now used equipment does qualify. Also, the section 179 expense limitation has increased to $1 million with a phase-out threshold of $2.5 million. While these can be great benefits, in some cases, it is better to use a more gradual expensing depreciation option.
- Corporate AMT: There is no longer a corporate alternative minimum tax!
On the negative side, these business deductions are no longer available:
- Entertainment deduction: There is no longer a deduction for business entertainment such as golf outings, fishing trips, tickets to professional sporting events, and theater tickets, to name a few. Before the new law was enacted, most business meals were generally only 50% deductible. Under the new law, business meals are still generally 50% deductible. An important step for 2018 tax planning would be to create a separate account to track all of the non-deductible entertainment expenses so we can easily identify them for tax purposes.
- Moving expenses: Employees may no longer deduct moving expenses, and employer reimbursement for these expenses is considered wage income including amounts paid directly by an employer to moving companies. Thus, an employee who relocates will pay tax on any reimbursements they receive.
- Like-kind IRC §1031 exchanges: Deferral of gain for exchanged property is limited to real estate property. Trading of vehicles, art and other collectibles will not qualify for like-kind IRC §1031 exchanges.
- Qualified transportation fringe benefits: Deductions for expenses associated with providing any qualified transportation fringe benefits to employees are repealed except as necessary to ensure the safety of an employee. Employers who were providing parking and transits passes in prior years and claiming business deduction may want to switch to a pretax salary reduction plan starting in 2018. Qualified transportation costs will continue to be tax-exempt to employees who pay their own costs using pretax income through an employer-sponsored salary-reduction program.
We believe the above changes are the most relevant and important to our clients but there are others as well so please feel free to reach out to your Bregante + Company LLP team to discuss how the new tax law will impact your specific situation. As the year continues the IRS is expected to adopt regulations and the practical effect of the new tax law and its many provisions will become more evident.