Although we’re in the third quarter of 2018, I find that business owners still have questions about the changes they can expect as a result of the Tax Cuts and Jobs Act. Signed into law on December 22, 2017, it created major changes to both individual and business income taxation.
The Tax Cuts and Jobs Act was President Trump’s first attempt at tax reform, and while the goal was to provide tax reporting simplification, the law ended up adding over 500 pages to the current code! The law is generally effective beginning after December 31, 2017. Some changes are intended to be permanent and some are scheduled to phase out on December 31, 2025. The following details may help clarify some important ways in which you and your business may be affected.
A major change in corporate tax law eliminates the previous tax structure which included four rate brackets – 15%, 25%, 34% and 35%, replacing those with a single flat rate of 21%. In light of this change, many business owners may want to rethink their S Corporation election.
Another change involves Section 199A Deductions which allows for a deduction on INDIVIDUAL returns based on your qualified business income calculation. The deduction is based on an aggregate of all qualified business income. If there is an aggregate loss for the tax year, this loss is carried forward as a qualified business loss carryforward to the following year, reducing the following year qualified business income.
Qualified business income includes trade or business income including S Corporations, Partnerships, Schedule C, and Schedule E activities but applies only to U.S. income. It does not include investment income or compensation paid to the taxpayer from the trade or business such as guaranteed payments or wages. The benefits of this deduction are limited by the type of business you’re in, specifically service businesses, as defined under Section 1202. Limitations do not apply if taxable income is less than $315,000 for those tax payers that file as Married Filing Jointly or less than $157,500 for those filing as Single.
Other aspects of taxation that are affected by the new tax law include:
- New depreciation rules apply to assets acquired after 9/27/17
- Section 179 increased to $1.0M vs Bonus
- Like-Kind Exchanges for real estate only (automobiles are no longer included)
- Qualified Improvement Property – roofs, HVAC, fire protection, security
- Business Deduction Changes:
- Entertainment – no longer included
- Membership dues – no longer included
- Meals for employees – now 50%
- Gifts – now must include on your W2
- R&D – now you must capitalize and deduct over 5 years
- Business Loss Limitation deferred to future years if > $500K MFJ or $250K other
- C Corp moves to a flat tax rate of 21%
- Medical deduction limitation back to 7.5%
- Tax deduction limited to $10K
- Charitable Contributions limitation increased from 50% of AGI to 60%
- Mortgage and Home Equity Indebtedness Interest Deduction is limited to $750K of underlying indebtedness
- Alimony payments out for divorces after 12-31-2018
- 529 Plans now used for private schools K-12
The specifics and nuances of this new law are many, so it’s important that you take steps now to get clear about how these and other changes may impact your tax obligation and strategy. Don’t wait until next April. You can get a clear picture now by asking your CPA to put together a forecast of the changes you can expect by applying your 2017 numbers to the 2018 tax law. Let me know how I can help! For more information, visit https://www.irs.gov/newsroom/tax-reform or contact me at 303-589-1613.