When Congress passed the “Tax Cuts and Jobs Act” (TCJA) in late 2017, it represented the most substantial tax reform legislation since 1986, and businesses are having to consider a vast array of new provisions that must be considered for year-end planning. COMBS, TENNANT, AND CARPENTER, P.C. is here to help guide business owners on how these changes will impact them and their businesses.
Attention
Please contact us before implementing any tax planning technique discussed in this article, which contains ideas for Federal income tax planning only. State income tax issues are not addressed. It’s important to evaluate a particular planning strategy by taking into account your overall tax liability first for both owners and the business entity.
20% Deduction for Certain Qualified Income
One of the most significant and far-reaching provisions under TCJA is the ability of qualified taxpayers to take a 20% Deduction with respect to “Qualified Business Income,” “Qualified REIT Dividends,” and “Publically-Traded Partnership Income.”
Of these three types of qualifying income, “Qualified Business Income” (QBI) is expected to have the biggest impact on the greatest number of taxpayers. In fact, this new 20% Deduction for QBI is already having a significant impact on a broad range of owners of pass-through businesses (i.e., S Corporations, Partnerships, Sole Proprietors). Consequently, the remainder of this discussion on the new 20% Deduction focuses primarily on “Qualified Business Income” (QBI).
Planning Alert! The rules for determining the 20% Deduction for Qualified REIT Dividends and Publicly-Traded Partnership Income are relatively straight forward. Please call us (link) if you would like additional information.
TCJA Reduces the Corporate Tax Rate to 21% and Eliminates Corporate AMT
For tax years beginning after 2017, TCJA provides for a flat tax rate of 21% (down from a top 35% rate) for regular “C” corporations. “Personal Service Corporations” (PSCs) are also subject to the flat 21% tax rate (down from a 35% flat tax rate). A PSC is generally a “C” corporation that is primarily in the business of providing services in the areas of health, law, accounting, engineering, architecture, actuarial sciences, performing arts, or consulting.
Repeal of “Corporate” Alternative Minimum Tax (AMT)
TCJA repeals the corporate AMT for tax years beginning after 2017. A corporation will be allowed a refundable credit for each of the tax years beginning in 2018, 2019, and 2020 equal to 50% of unused AMT credit carryovers to those respective years in excess of the regular tax for those years. Any AMT credit carryover amount that remains unused after applying it to the 2021 regular tax is 100% refundable.
Planning with the First-Year 168(k) Bonus Depreciation Deduction after TCJA
For the past several years, one of the most popular tax-favored business deductions has been the 168(k) Bonus Depreciation deduction. Before TCJA, the 168(k) Bonus Depreciation deduction was equal to 50% of the cost of qualifying “new” depreciable assets placed-in-service. TCJA generally increased the 168(k) Bonus Depreciation deduction to 100% for qualifying property acquired and placed-in-service after September 27, 2017 and before January 1, 2023.
Note: Make sure newly-acquired property is “placed-in-service” by year end!
Annual Depreciation Caps for Passenger Vehicles Increased
Vehicles used primarily in business generally qualify for the 168(k) Bonus Depreciation. However, there is a dollar cap imposed on business cars, and also on trucks, vans, and SUVs that have a loaded vehicle weight of 6,000 lbs or less. More specifically, these vehicles acquired and placed-in-service in 2017 and used 100% for business were generally allowed maximum depreciation of $3,160 ($3,560 for trucks and vans). Also, these caps were increased by $8,000 if the vehicle otherwise qualified for the 168(k) Bonus Depreciation.
Planning with Section 179 Deduction
Another popular and frequently-used business tax break is the up-front Section 179 Deduction (“179 Deduction”). For 179 Property placed-in-service in tax years beginning after 2017, TCJA made several taxpayer-friendly enhancements to the 179 Deduction which include:
Increasing the 179 Deduction limitation to $1,000,000 (up from $510,000 for 2017)
Increasing the phase-out threshold to $2,500,000 (up from $2,030,000 for 2017)
Expanding the types of business property that qualify for the 179 Deduction
Note: Make sure newly-acquired property is “placed-in-service” by year end!
Be Careful with Employee Business Expenses after TCJA
Starting in 2018 and through 2025, “un-reimbursed” employee business expenses are not deductible at all. For example, you will not be able to deduct any of the following business expenses you incur as an “employee” if you are not properly reimbursed by your employer:
Automobile expenses (including auto mileage, vehicle depreciation)
Costs of travel, transportation, lodging, and meals related to the employee’s work
Union dues and expenses
Work clothes and uniforms
Otherwise qualifying employee’s home office expenses
Dues to a chamber of commerce for employment-related purposes
Professional dues
Work-Related education expenses
Job search expenses in the employee’s present occupation
Licenses and regulatory fees
Malpractice insurance premiums
Subscriptions to professional journals and trade magazines related to the employee’s work
Tools and supplies used in the employee’s work
Other TCJA Tax Changes Impacting Business
Compensation Must Be “Reasonable”
If the IRS determines that you have taken unreasonably “low” compensation from your S corporation, the Service will generally argue that other amounts you have received from your S corporation (e.g., distributions) are disguised “compensation” and should be subject to FICA taxes.
Establishing A New Retirement Plan For 2018
Calendar-year taxpayers wishing to establish a qualified retirement plan for 2018 (e.g. profit-sharing, 401(k), or defined benefit plan) generally must adopt the plan no later than December 31, 2018. However, a SEP may be established by the due date of the tax return (including extensions), but a SIMPLE plan must have been established no later than October 1, 2018.