You’ve likely wrapped up your 2017 taxes by now, and are looking ahead into 2018. The new Tax Cuts and Jobs Act brings numerous changes to the already enormous tax code. More than ever you need a plan. For example, here are just 5 of the things you need to know before the 2018 tax season:
1: The New Tax Law Limits Business Interest Deductions for Some
In the past, businesses have been able to write off an unlimited amount of interest they use to finance their assets. You may have heard that the new law limits deductions for business interest. That’s true—but those limits aren’t likely to affect most of you. For starters, the limits don’t apply unless your business averages $25 million or more in gross receipts. Even if you don’t make that much, you can still deduct interest up to whatever amount of interest you earn, plus 30% of your adjusted taxable income, plus any floor-plan interest you pay to finance your stock. You can also carry forward any disallowed interest deduction as long as you need to.
2: Domestic Production Activities Are No Longer Deductible
The American Jobs Creation Act of 2004 created the Domestic Production Activities Deduction (DPAD) to promote jobs in domestic manufacturing. The resulting Section 199 rules let businesses with “qualified production activities” deduct up to 9% of their net income from those activities. The rules are complicated, but the deductions had been substantial. Unfortunately, the new tax law repeals that deduction going forward. Plan accordingly.
3: Changes to Fines and Penalties Under the New Law
The new law also makes some changes to how businesses can treat fines and penalties. First, it denies deductions for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if the settlement includes a nondisclosure agreement. The new tax code also relaxes the general rule that fines or penalties are nondeductible by carving out an exception for amounts, identified as such in a court order or settlement agreement, as restitution, remediation, or required to come into compliance with any law.
4: 3 Changes to Net Operating Loss Rules
Under the previous tax law, if you had a net operating loss (NOL), you could carry it back for up to two years and get a refund, depending on the size of that loss, of up to 100% of the taxes you paid in those previous years. If the net operating loss was more than you made in those previous two years, you could carry it forward up to 20 years. Alternatively, you could elect to forego the carryback and just carry the losses forward.
The new law makes three changes to the NOL rules: 1. It eliminates the two-year carryback period, except for farming businesses and property/casualty insurance companies. 2. It lets you carry your unused NOLs forward indefinitely, rather than just 20 years. 3. Finally, it limits your NOL deduction for future years to 80% of that year’s taxable income. Nobody likes to lose money, but NOLs can be the tax-planning equivalent of gold. If you have NOLs, Financial Gravity can help you make magic with them now.
5: Business Entertaining Won’t Be So Entertaining Anymore…
Under the old rules, you could deduct 50% of the cost of any entertainment expenses that took place directly before or after a substantial, bona fide discussion directly related to the active conduct of your business. Deductions included the face value of tickets to sporting and theatrical events, food and beverages, parking, taxes, and tips. The new law repeals that deduction, regardless of what business entity you operate. The new law also tightens rules for deducting business meals. Previously, you could deduct 100% of the cost of providing food and beverages to your employees through an eating facility that qualified as “de minimis” fringe benefits. The new rule cuts that deduction to just 50%.
The New Tax Law Book Tells You Like It Is
For business owners who want to better understand the new tax code and how to reduce their tax obligations, we highly recommend The New Tax Law book—available for free from Financial Gravity. Order the book and request a free tax assessment from one of Financial Gravity’s team members: Let’s Talk!