I’m in the exit planning business, but as a CPA operating my own firm for more than four decades, I find that business owners have many questions about the consequences of the Tax Cuts and Jobs Act bill. I believe the following details will be helpful in clarifying some important ways in which it may affect you.
Signed into law on December 22, 2017, the Tax Cuts and Jobs Act bill created major changes to individual and business income taxation. Generally effective for tax years beginning after December 31, 2017, some changes to tax law are permanent. However, some are temporary, phasing out on December 31, 2025.
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 carry forward 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 US 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.
Many other aspects of taxation are affected by the new tax law including:
- 179 increased to $1.0M vs Bonus
- Like-Kind Exchanges – real estate only – automobiles are out
- Qualified Improvement Property – roofs, HVAC, fire protection, security
- Business Deductions
- Entertainment – out
- Membership dues – out
- Meals for employees – now 50%
- Gifts – include on W2
- R&D – capitalize & deduct over 5 years
- Business Loss Limitation deferred to future years if > $500K MFJ or $250K other
- C Corp Changes flat tax rate 21% still have to get the money out of the C Corp
- 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
Of course, the smartest strategy is to talk with your CPA for details on these and other changes that may impact your tax obligation and strategy. For more information, visit https://www.irs.gov/newsroom/tax-reform.