Over the past several months, we've digested the many tax law changes brought by the Tax Cuts and Jobs Act (TCJA). These changes bring a host of uncertainties as well as planning opportunities.
From lower tax rates to a new deduction for pass-through income, the new tax law may mean more cash in your pocket. Some tax planning ideas under the TCJA for you to think about this fall while there's sufficient time left in 2018 to take tax-saving actions.
Does my business need to convert to a C corporation?
Not necessarily. You may have heard that C corporations receive a huge tax cut under the TCJA. That is generally true for income taxed at the corporate level. Under prior law, C corporations were subject to graduated tax rates, with a top rate of 35 percent. Under the TCJA, C corporations are taxed at a flat rate of 21 percent. This is substantially lower than the top individual tax rate of 37 percent (29.6 percent if you factor in the new deduction for qualified business income -- more on that later).
Did my business's favorite deduction or credit go away?
Possibly. The TCJA alters the rules for many of our favorite tax deductions and credits. Here are some of the more notable changes:
• Domestic Production Activities Deduction. Under prior law, businesses could deduct a percentage of the income earned from certain manufacturing and other production activities conducted within the U.S. The TCJA eliminates this deduction for tax years starting in 2018.
• Net Operating Losses (NOL's). Under the TCJA, a business's (C Corporations) NOL deduction is limited to 80 percent of taxable income. In addition, most businesses can no longer carry back their NOLs to the prior two tax years. However, rather than expiring after 20 years, NOLs can be carried forward indefinitely.
• Interest Expense. Regardless of its form, every business will be subject to a net interest expense disallowance. Starting in 2018, net interest expense in excess of 30 percent of your business's adjusted taxable income will be disallowed. However, your business won't be subject to this rule if its average annual gross receipts for the prior three years is $25 million or less.
• Meals and Entertainment. Unfortunately, the TCJA eliminates the 50 percent deduction for business-related entertainment expenses. Also, the deduction for meals provided in an in-house cafeteria is now limited to 50 percent.
• Like-kind Exchanges. The TCJA limits the like-kind exchange rules, so they apply only to real property that isn't held primarily for sale.
What is this new 20 percent pass-through deduction?
You may have heard a lot of talk in the news about a new deduction for "pass-through" income, but it's actually available for qualified business income from a sole proprietorship (including a farm), as well as from pass-through entities, such as partnerships, LLCs, and S corporations. Under the TCJA, individuals may deduct up to 20 percent of their qualified business income. (For individuals in the new 37 percent tax bracket, qualified business income may be taxed at an effective top marginal rate of 29.6 percent.)
However, the deduction is subject to various rules and limitations
Is this a good year for my business to purchase new assets?
Yes. In addition to the new 100 percent bonus depreciation deduction we mentioned earlier, the TCJA increases the maximum amount of qualifying property a taxpayer may expense in 2018 to $1 million (up from $510,000 in 2017). If more than $2.5 million of property is placed in service during 2018, the $1 million limit is reduced by the excess over $2.5 million.
This year is definitely unique given the numerous tax law changes brought by the TCJA. Even with uncertainty about some of the TCJA's provisions, there are things you can do to improve your situation.
• Mark Gallegos is a senior manager at Porte Brown.