Tax Tip of the Week
March 19, 2018:
Tax Cuts & Jobs Act (recently enacted in December 2017) offers small business tax breaks
The Tax Cuts and Jobs Act (TCJA) has given businesses lower corporate tax rates, in addition to other potential benefits. With wary tax reduction planning, your small business may realize big tax savings under the new law and should be informed of the ways in which your business can take advantage of changes in the new tax bill. Below are a few tax-saving opportunities for 2018:
The graduated tax rate structure for corporations, featuring a top tax rate of 35%, is being replaced by a flat rate of 21%. As a result, the overall tax liability of many C corporations will be reduced. Furthermore, cash accounting was generally not available to corporations with average gross receipts for the three prior years of $5 million or more. This rule has been replaced by a $25 million gross receipts test.
The net income of pass-through entities for business owners with partnerships, S corporations, limited liability companies (LLCs) and sole proprietors is effectively taxed at individual tax rates. Now, for the first time ever, the new law creates a 20% deduction on income for pass-through entities, subject to certain limitations. Notably, the deduction only applies to “qualified business income” and can’t be claimed by taxpayers in service businesses (excluding architecture and engineering) for single filers with taxable income above $157,500, and $315,000 for joint filers.
Place assets in service:
Under IRC Section 179, a business can now deduct the cost of up to $1 million of qualified assets a year, doubling from the previous threshold of $500,000. However, Section 179 deduction is still limited to the amount of income from the business activity.
In recent years, the percentage for first-year “bonus depreciation” deductions has fluctuated, complicating tax planning. Now the new law hikes the bonus depreciation deduction from 50% to 100% for five years and then gradually phases out the deduction over the next five years. Added bonus: The deduction has been expanded to include “used” property that otherwise qualifies under this provision.
Consider buying a new business (luxury) car:
The TCJA also increases depreciation deductions allowed for cars used for business driving. Specifically, it hikes the annual limits for luxury cars for each year in service. For instance, the first-year write-off for a car jumps from $3,160 in 2017 to $10,000 in 2018, not even counting bonus depreciation. If you're shopping for a new business car, now's a good tax time to buy.
Tax Credit for Employer-Paid Medical or Family Leave Wages:
The TCJA creates a new tax credit of employer-paid wages paid for family or medical leave. The credit can range from 12,5% to 25%, depending on the amount paid. But this credit disappears after 2019.
Entertainment Expenses Deduction:
Entertain expenses directly-related-to or associated-with the conduct of business are repealed.
In wake of the biggest tax reform since 1986, small business clients should, at the least, consider the tax benefits and consequences directly related to their business. Some of our clients may be tempted to shift the form of business ownership or transfer ownership shares to other family members to take full advantage of this tax break.
Note: expect the IRS to issue more guidance on the new deduction for pass-through entities and other aspects of the new tax law affecting small businesses in the months to come. We will continue to update you on significant new developments that may affect you or your business.
Please do not hesitate to contact us at 559-226-2209 if you have any questions or concerns about preparing your 2017 tax return. In addition, if you would like to schedule an appointment, either call us or email us at firstname.lastname@example.org. Alternatively, you can schedule an appointment by submitting an online form through our website at www.rooscpa.com/contact-us/.
Hope you find this helpful and we look forward to serving you.
Any financial or tax information contained in this article is taken from a general view and should not be acted upon in your specific circumstances without further details and analysis of the situation or professional assistance from a CPA or tax return preparer.
We have created this forum to help provide you with solutions to issues that come up in the accounting profession. If you have any accounting or tax questions you would like us to discuss in detail in a future week, feel free to leave comments in the forums!