2018 Tax Cuts for Business

By Lou Alice Funk, CPA, MBA

Much has been said in the media about the new Tax Cuts & Jobs Act, and it is indeed full of changes that will affect all of our clients in differing degrees.   The substantive effects of those changes begin in 2018, so the tax returns we are working on this season will not be greatly affected.  However, we feel that all of our business clients would benefit from a review of the new provisions.

Our plan is to schedule meetings with our business clients beginning in May to do customized analysis of the effects of the new law, and help our clients determine if changes to compensation strategy or form of ownership would lower their overall tax bill.  We are expecting that, by that time, the IRS will have clarified some of the areas in the code that are now vague.

Please let us know if you would like to schedule a meeting to discuss your situation in more detail.  Until then, here is a short list of some changes in the law that may be of benefit to your business. 

20% Passthrough income deduction

The act includes a new deduction of 20% of “qualified business income” passed from a partnership, S-corporation or sole proprietorship.  The 20% deduction is limited by W-2 wages, and, for specified service businesses, the deduction is limited above a certain income threshold.  This deduction is the most complicated provision in the act, and the one that still needs the most clarification.  We have attended two seminars on the topic thus far, and we strongly believe there will be clarifications issued by the IRS over the coming months, as businesses seek to evaluate how it will affect them.

C-corporation tax rate

The flat tax rate for C-corporations is now 21%.  Formerly the rate graduated from 15% up to 39%.  The flat rate on personal service corporations has now become 21% as well, down from 35%.

Depreciation changes

Bonus Depreciation:

Businesses can deduct 100% of the cost of eligible property as “bonus depreciation”.  Formerly the deduction was 50%, and it only applied to new property.  Now used property qualifies as well.

Section 179 expense:

In addition to bonus depreciation, taxpayers can use section 179 to expense up to $1 million per year in assets.   

Deductions for Real Estate Investors

The new law also allows section 179 to be used to deduct furnishings for lodging.  In addition, taxpayers can now deduct the following expenses for non-residential real property in the year of

 

acquisition:  roofs, heating, ventilation, air-conditioning; fire protection and alarm and security systems.

Depreciation for Automobiles

The IRS increased the 280Fdeduction limits for new “luxury” autos.  In the year of purchase, the deduction went from $3160 to $10,000 when bonus depreciation is not claimed.

Cash Method of Accounting

The act expanded the list of taxpayers that can use the cash method of accounting by allowing taxpayers with average annual gross receipts of $25 million or less to use the cash method.   In addition, if a taxpayer meets the gross receipts test, the cash method may be used regardless of whether the purchase, production, or sale of merchandise is an income-producing factor.   Taxpayers meeting the  cash-method $25 million gross-receipts test will not be required to account for inventories under section 471.  Instead, inventories may be treated as non-incidental materials and supplies.

Interest deductions

The act placed a percentage limit on the amount of interest a business can deduct, but the good news is that any taxpayer that meets the $25million gross-receipts test is exempted from the limitation.  The limit will also not apply to real property development, construction, rental, operation, management, leasing or brokerage businesses. 

Like-kind exchanges

Like kind exchange rules will no longer be used for vehicle trades and other tangible property.  Now the like kind rules only apply to exchanges of real property that is not primarily held for sale. 

Entertainment expenses

The act disallowed deductions for activities generally considered to be entertainment, amusement or recreation.  Also disallowed are certain club dues and fees for facilities related to entertainment, amusement or recreation activities.  Previously such activities could be deducted at 50% if they met the tests for connection with substantial business activity.

Meals

Taxpayers are still able to deduct 50% of meals associated with their business.  The 50% limitation also now applies to meals provided through on-premises eating facilities  and meals provided for the convenience of the employer which were previously deductible at 100%. 

Domestic Production activities

The act repealed the section 199 domestic production activities deduction.

The above information is not a complete list of changes in the 2017 Tax Cuts and Jobs Act, and does not include a discussion of individual/personal tax law changes.  This is intended to be a summary of key provisions that might affect small business clients.