Even though the government is currently shut down, that won’t stop the upcoming 2018 income tax filing season. Business owners may, therefore, want to shift their focus to assessing whether they’ll likely owe taxes or get a refund when they file their returns this spring. With the biggest tax law change since 1986 —the Tax Cuts and Jobs Act (TCJA) — generally going into effect beginning in 2018, most businesses and their owners will be significantly impacted. So, refreshing yourself on the major changes is a good idea.
Taxation of pass-through entities
These changes generally affect owners of S corporations, partnerships and limited liability companies (LLCs) treated as partnerships, as well as Schedule C filers (i.e., sole proprietors):
- Decrease in individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
- A new 20% qualified business income deduction for eligible owners (the Section 199A deduction);
- Changes to many other tax breaks for individuals that will impact owners’ overall tax liability
- Is 2018 a good year to change from the accrual method to the cash basis method of accounting?
Taxation of corporations
These changes generally affect C corporations, personal service corporations (PSCs) and LLCs treated as C corporations:
- Replacement of graduated corporate rates ranging from 15% to 35% with a flat corporate rate of 21% (note: even fiscal year C Corporation filers will benefit from pro-rated lower C corporate tax rates)
- Replacement of the flat PSC rate of 35% with a flat rate of 21%
- Repeal of the 20% corporate alternative minimum tax (AMT)
Tax break positives
These changes generally apply to both pass-through entities and corporations:
- Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets (in the past, the assets qualifying for bonus depreciation had to be “new”)
- Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phase-out threshold to $2.5 million
- A new tax credit for employer-paid family and medical leave
Tax break negatives
These changes generally also apply to both pass-through entities and corporations:
- A new disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
- New limits on net operating loss (NOL) deductions
- Elimination of the domestic production activities deduction (“DPAD”) commonly referred to as the “manufacturers’ deduction”
- A new rule limiting like-kind exchanges to ONLY real property that is not held primarily for sale (generally, no more like-kind exchanges are allowed for personal property and vehicle trade-ins)
- New limitations on deductions for certain employee fringe benefits, entertainment deductions (i.e., no longer deductible) and, in certain circumstances, meals and transportation.
Preparing for 2018 filing
Keep in mind that additional rules and limits apply to the rates and breaks covered here. Also, these are only some of the most significant and widely applicable TCJA changes. You and your business could be affected by other changes as well. Finally, the IRS is expected to issue final regulations and other guidance that may expand some TCJA provisions or may limit their application. We’ll blog more as soon as any new information is released. In the meantime, contact us to learn precisely how you might be affected and for help preparing for your 2018 tax return filing — and beginning to plan for tax year 2019, too.
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