The Tax Cuts and Jobs Act (TCJA) signed before year-end provides many tax-saving opportunities for businesses. Most business owners will see savings, but with those savings comes the reduction or elimination of a number of tax breaks. Below are just a few of the major changes impacting businesses and their owners.
Lower corporate rates, with a catch
The graduated tax rate for corporations (with a top rate of 35 percent) has been replaced by a flat rate of 21 percent (including personal service corporations). Overall taxes will be reduced, although corporations with lower taxable income could pay more. Corporate alternative minimum tax (AMT) has been repealed which will increase the benefit of certain business credits (including R & D).
Unfortunately, many business deductions have been reduced or eliminated entirely. Most notably there are new limitations on the deduction of interest expense, while deductions for meals, entertainment, and other employee benefits have been reduced. The domestic production activities deduction has been repealed. Net operating loss (NOL) carry-overs have also been changed. The new law no longer allows NOL carrybacks and carryforwards will only be able to offset 80 percent of taxable income.
Faster capital expense write-offs
Many businesses can begin immediately expensing their purchases of equipment under Section 179. The amount taxpayers may expense has been increased to $1 million. Bonus depreciation has been increased to 100 percent for property placed in service after September 27, 2017, potentially impacting 2017 tax returns. Bonus depreciation doesn't have the same taxable income limitation as Section 179 and the property no longer has to be new. This generous provision allows businesses to maximize deductions in 2017 after year-end to take advantage of higher 2017 tax rates and potential carrybacks. There are also larger potential deductions for passenger autos beginning in 2018.
Favorable accounting methods, potentially
For tax years beginning in 2018, the cash method of accounting may be used by taxpayers that satisfy the $25 million gross receipts test regardless of whether the purchase, production, or sale of merchandise is an income-producing factor. Businesses that were forced to use the accrual method for tax purposes may be allowed to go to the cash method in 2018.
About that pass-through entity deduction
Pass-through businesses include businesses treated as sole proprietorships, partnerships, and S corporations for tax purposes. For tax years beginning in 2018 and before 2026, owners of pass-through entities (other than C corporations) will receive a new deduction based on qualified business income (QBI). The QBI deduction does not reduce adjusted gross income (AGI). Instead it is an additional deduction applied after the standard deduction to reduce taxable income. The deduction generally equals 20 percent of QBI, subject to several limitations including W-2 wages, depreciable property and taxable income. There will be much more to come on this provision.
What about Illinois?
Illinois has raised their tax rates on individuals and corporations. Taxpayers with more than 250k/500k of AGI will now lose their education expense and property tax credits. It's likely that the pass-through deduction will be added back.
The new laws impact just about everyone and are extremely complex. At Weiss & Company, we can provide a comprehensive review of the tax-saving opportunities appropriate to your particular situation.
• Jim Hamilton is partner with Weiss & Company LLP in Glenview.