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We previously provided a summary of the changes to individual tax laws due to the signing of the Tax Cuts and Jobs Act by President Trump on December 22nd. As a follow-up to that, we wanted to provide a similar summary for the bill’s effect on business and estate taxes. While we understand this doesn’t affect everyone, we wanted to be sure we were complete in our analysis. There was some immediate confusion about how the application of individual tax changes pertained to business taxes and we want to be sure we clearly delineate between the two.
We’ve once again framed the changes in a Frequently Asked Questions format to highlight the new provisions of the tax bill and how they could affect businesses and estates:
**Please note that everyone’s situation is different. It is very important to remember that any advice or instruction provided rarely applies evenly to everyone. Please consult your tax advisor if you are on the fence about how a potential recommendation applies to you BEFORE you take action.**
DOES THIS REFORM APPLY TO THIS YEAR’S TAXES?
  • No. All items being discussed as part of the new bill apply to the 2018 calendar year for which taxes will be prepared in 2019.
HOW DOES THIS AFFECT MY BUSINESS?
  • Passthrough Entities – Beginning in 2018, taxpayers can deduct up to 20% of qualified business income passed through to them from their LLC, Partnership, S Corporation, or Sole Proprietorship (Schedule C). For taxpayers with income above certain thresholds, this deduction is limited based on wages paid by the business. In addition, income from certain businesses – such as law firms, accounting firms, and doctors’ offices – is not eligible for the deduction.
  •  C-Corporations – Beginning in 2018, C Corps will be taxed at a flat 21% rate. In addition, the Corporate AMT was repealed.
ARE BUSINESS DEDUCTIONS GOING AWAY?
  • No, not at all. The deductibility of most everything stays intact at the business tax level as it was in 2017. We’ve highlighted the very few changes in the next section. There was some confusion due to unreimbursed employee expenses no longer being deductible by individual taxpayers on their personal tax returns, but that doesn’t apply to expenses incurred by a business. Besides the expenses highlighted in the next section, the deductibility of all other business expenses are set to remain intact.
  • For example, the individual tax law changes caused real estate taxes paid on personal property to be limited starting in 2018. However, if this expense is incurred as part of a rental property, it will continue to be deductible against income as it always has. The individual deductibility changed but the business deduction remained the exact same.
WHAT BUSINESS DEDUCTIONS WERE CHANGED?
  • The new law makes only minimal changes to the deductibility of business expenses, discussed below:
  • Net Operating Losses – Businesses can no longer carry back net operating losses, but may carry such losses forward indefinitely.
  • Entertainment Expenses – In general, the new law has eliminated deductions for entertainment expenses. However, there are multiple exceptions and many expenses may still be deductible (e.g. expenses for entertainment sold to customers) so please consult with your tax advisor if you have any questions regarding the deductibility of your entertainment expenses. In addition, please note that the deduction for meals remains intact.
  • Transportation Fringe Benefits – Businesses can no longer deduct the cost of certain transportation benefits (such as parking passes) provided to employees.
  • Domestic Production Activities Deductions –  Businesses can no longer deduct a portion of their income attributable to certain U.S. production activities.
IS THERE ANYTHING URGENT FOR ME TO DO AS A BUSINESS OWNER PRIOR TO YEAR-END?
  • The short answer is no. Outside of capturing expenses in 2017 at a potentially higher marginal tax bracket than they will be in 2018, there are no radical changes to business tax laws that would cause any need to rush to a decision on something by year-end. As the law continues to iron itself out, we’ll be keeping a close eye on potential efficiency opportunities.
WHAT ELSE CHANGED?
  • Section 179 Expensing – The overall dollar limitation for expensing depreciable assets under Code Sec. 179 has been increased from $500,000 to $1,000,000. In addition, improvements to the interior of nonresidential real property, along with roofs, heating, ventilation, and air conditioning, are now eligible for section 179 expensing.
  • Bonus Depreciation – The new law increases the bonus depreciation rate from 50% to 100% for property acquired and placed in service in 2018. The rate will phase down beginning in 2023
  • Like-Kind Exchanges – Beginning in 2018, like-kind exchange treatment is only allowed for exchanges of real property. Exchanges of personal property and intangible property are generally no longer eligible for deferred gain or loss recognition under the like kind exchange rules.
HOW WILL ESTATES BE TAXED UNDER THE NEW LAW?
  • The new law has doubled the estate and gift tax exclusion. Accordingly, decedents dying in 2018 will pay no tax on the first $11.2 million of their estates. Because spouses can combine their exclusion amounts, the new law allows married couples to pass up to $22.4 million to heirs tax-free.
Because this is a very basic breakdown of the changes affecting businesses and estates, any detailed questions or situations should be discussed with your tax advisor based on your unique tax situation rather than blanketed application of the new tax laws.