On December 22, 2017, the President signed the Tax Cuts and Jobs Act ("Act"). The Act will have a significant impact on businesses for many years to come. Many of the Act’s provisions are still unclear and will require IRS guidance but there’s no question that you should immediately start planning with your financial, tax and legal advisors. The following is a short summary of how some of the provisions of the Act may affect your business.
Business Entity Taxation:
- The corporate income tax rate is now 21% from a high of 35%. This change is permanent and includes personal service corporations.
- The corporate alternative minimum tax (AMT) has been eliminated.
- There is a new Internal Revenue Code Section 199A that provides an owner of a pass-through entity (i.e., S corporation, partnership, limited liability company, sole proprietorships) a 20% income tax deduction on “qualified business income.” Section 199A, however, is very complex and contains numerous requirements and limitations. One of those limitations is that a business that is a “specified service trade or business (SSTB)” is not eligible. A SSTB is a business that performs services in the fields of health, law, accounting, performing arts, consulting, financial services, brokerage services, athletics and actual sciences where the principal asset of the business is the reputation or skill of its employees or owners. However, owners of a SSTB may be eligible for some or all of the deduction if total taxable income from all sources does not exceed certain limits - $157,500/$315,000 (single/married joint filer) to $207,500/$415,000.
Other Business Tax Provisions:
- Formerly, no gain or loss was recognized to the extent that property held for productive use in the taxpayer's trade or business, or property held for investment purposes, was exchanged for property of a like-kind. Like-kind exchanges under IRC §1031 are now limited to real estate that is not held primarily for sale.
- The Act increases the amount that a taxpayer may expense under IRC §179 to $1,000,000. The Act also increases the phaseout threshold to $2,500,000. These amounts are indexed for inflation for tax years beginning after 2018.
- Beginning in 2018 and through 2025, a non-corporate taxpayer cannot deduct excess business losses. Excess business losses become a net operating loss (NOL) – the amount by which a taxpayer's current-year business deductions exceed its current-year gross income. Formerly, NOLs were not deductible in the year generated, but could be carried back two years and carried forward 20 years. The Act now limits the NOL deduction to 80% of taxable income and provides that amounts carried to other years be adjusted to account for the limitation for losses arising in tax years beginning after Dec. 31, 2017. The Act eliminates carrybacks (except for farming NOLs, which would be permitted a two-year carryback) and allows unused NOLs to be carried forward indefinitely.
- No deduction is allowed for entertainment, amusement, or recreation; membership dues for a club organized for business, pleasure, recreation, or other social purposes; or a facility used in connection with any of the above.
- Business interest is generally allowed as a deduction in the tax year in which the interest is paid or accrued, subject to a numbe1r of limitations. The Act now limits the deduction to the sum of business interest income, 30% of the business’s adjusted taxable income, and floor plan financing interest. Businesses with average annual gross receipts of $25 million or less are exempt from the limit. Disallowed interest could be carried forward indefinitely.
- Taxpayers receive an additional depreciation deduction in the year in which it places certain “qualified property” in service (known as “bonus depreciation”). The Act allows immediate full expensing for property placed in service after September 27, 2017, gradually reducing the percentage that may be expensed for property placed in service after Jan. 1, 2023 through 2026.
Planning Considerations:
- Does it make sense for your business to convert to a C corporation?
- If your business is already a C corporation, should you explore converting to a pass-through entity?
- Does it make sense to fractionalize your business into more than one entity to take advantage of the Section 199A deduction?
- How do the business tax provisions impact your current plans for growth and expansion?
- How do the business tax provisions impact your marketing plan to attract business from new prospects and existing clients?
There are many questions that still need to be answered. Talk to your advisor today. Don’t delay!