2017 ended with a lot more than champagne and fireworks. Recent tax changes wreaked havoc on a lot of people’s business planning. The House of Representatives and Senate reconciled their two versions of the Tax Cuts and Jobs Act, and on December 22, the President signed it into law.
Unless you have been living under a rock, you already know that this represents the biggest change to tax law in over 30 years. And whether you were for or against the Tax Cuts and Jobs Act, it impacts the taxes you pay as an individual and as a business owner.
We have already covered 11 major changes for individuals. This post will focus on businesses.
The best tax strategies vary based on your state, the type of entity you chose (e.g., an LLC), and the way you file federal taxes (e.g., as an S Corporation).
The 7 changes below aren’t a comprehensive list, so be sure to read up and consult with your CPA.
Change #1 – 100% bonus depreciation for 2018-2022
This is a big deal. You can write off 100% of the purchase of qualifying equipment and furniture in the first year rather than spreading that depreciation out over several years as you had to do in the past.
In addition, bonus depreciation is not limited to income, which means that, unlike the Section 179 expense, it can be taken to create or increase a loss.
But be careful! Bonus depreciation can come back to bite you at the state level since not all states follow the federal rules. For example, in Tennessee, when you calculate your Tennessee taxable income, bonus depreciation is an addback and is subject to the excise tax.
Change #2 – Lower top corporate tax rate
The Tax Cuts and Jobs Act reduced the top corporate tax rate significantly from 35% to 21%.
Change #3 – Carrying back Net Operating Losses
You can no longer carry back Net Operating Losses to previous years in order to offset income and tax already paid. You can carry them forward indefinitely and offset up to 80% of taxable income, but you cannot use a net operating loss from a previous year to completely zero out income.
Change #4 – Section 199A pass-through deductions
Self-employed individuals can now take advantage of a deduction on their self-employment income—subject to phase outs. This type of Section 199A pass-through deduction is the “equivalent” of the reduced corporate tax rate for pass-through entities.
Various considerations, including limitations on service industries, W-2 wage levels, and total income levels, make this change an absolute bear from a tax perspective. Because this deduction happens at the individual level, it requires complex planning. There is no one-size-fits-all solution for restructuring to achieve the maximum benefit.
This will sound self-serving, but the best advice we can give you is talk to your CPA. We get paid to know all the complexities and can help you figure out how to maximize your benefit given your particular situation..
Change #5 – Domestic Production Activities Deduction
The Domestic Production Activities Deduction has been repealed.
Change #6 – Depreciation on “luxury autos”
The limits for depreciation on “luxury autos” have been increased.
Change #7 – Deduction for transportation fringe benefits
The deduction for transportation fringe benefits has been repealed. These are now nondeductible. Sorry.
The Tax Cuts and Jobs Act introduced many more changes that affect businesses, but we’ll stop at seven. If you have questions about how the new tax laws should influence your tax planning strategy, feel free to give us a call at (865) 691-8509.