The Tax Cuts and Jobs Act of 2017 represents a major overhaul of the tax code. As a business owner, your accountant should be advising you about the upcoming changes to the tax code and how to best use it in order to keep more of your income. Here are five important changes about which your accountant should be informing you that just came out in the new tax law:
1. Lower Tax Rates For Some Business Structures
Business owners may benefit overall from the reduction in individual tax rates. However, those living in high-tax states such as New Jersey or California and who itemize deductions may not see as much benefit due to the new deduction limits on state and local taxes and mortgage interest. On the other hand, business owners in low-tax states like Texas or Florida are likely to see a lower tax bill due to lower individual tax rates plus reduced business income tax rates.
“Pass-through” entities such as “S” corporations, LLCs, sole-proprietorships, and partnerships used to be taxed at the same rate as the individual owner’s rate when their net income was passed through to the owner’s personal tax return. Now, under the new tax law, you can take a 20% deduction on that income when it hits your personal tax return. As always, there are some exceptions. For example, service businesses whose taxable income exceeds $157,500 for single filers and $315,000 for joint filers, will not be able to claim this deduction. Also, in the new tax law, the graduated tax rate previously in place for all “C” corporations, which topped out at 35%, will be replaced by a flat rate of 21%.
2. Increased Bonus Depreciation
One difficulty in past tax years with looking at “up-front” depreciation on business equipment or real estate bought for your business was knowing what percentage to deduct. It was often difficult to decide whether to take the deduction up front or write these expenses off for a period of years. This decision made figuring the tax, as well tax planning for capital expenditures, difficult. Thanks to the new tax law, you’ll be able to start claiming 50% bonus depreciation on your 2017 return, and starting with your 2018 return, it will be 100%. The legislation allows it to be phased out completely over the next 5 years.
3. Expanded Availability of Cash Accounting
Basically, “cash accounting,” or “cash-basis” accounting, is an accounting method in which payment receipts are recorded during the period they are received, and expenses are recorded in the period in which they are actually paid. In the previous tax code, businesses couldn’t use cash accounting if their annual gross receipts averaged $5 million or more for the previous 3 years. The old limit has now been raised to $25 million in the new tax law, which should simplify things considerably for high-income businesses that depend heavily on moving a large volume of inventory throughout the year.
4. Fewer Deductions and Credits
Somewhat counterintuitively for those who expected the new tax law to be completely business-friendly, there are fewer deductions and credits available than in previous years. Some have been reduced and others have been simply repealed. For example, business interest expenses have been reduced to 30% of taxable income. This rule, however, doesn’t apply to businesses with average annual gross income of $25 million or less. On the chopping block: entertainment expenses associated with the conduct of business, transportation fringe benefits, and domestic property activities (Section 199). Reporting and claiming net operating losses (NOL) will also change. Going forward, you won’t be able to carry them back for 2 years, but the 20-year limit on carrying them forward will be removed. One piece of good news is that the amount you can deduct for business property costs (Section 179) has doubled from $500,000 to $1 million.
5. Higher Contribution Caps For Retirement Plans
For qualified retirement savings plans, the annual contribution cap may have increased–both for you and your employees. 401(k), 403(b) and 457 plans have all seen an increase in annual maximum contribution amounts–from $18,000 to $18,500. For those over the age of 50 making “catch-up” contributions, the annual maximum has thereby increased from $24,000 to $24,500. Unfortunately, there has been no similar change for IRA or Roth IRA contributions.
Since the new tax law took effect on Jan. 1, 2018, there is little time left to make many adjustments to your 2018 strategic plans and budgets. However, it is advisable to review your plans with the guidance of a trusted financial counselor to ensure you understand the full impact of these tax changes on your business and personal tax situations.
Find out how you can stop overpaying on your taxes! Speak with a Financial Gravity tax expert, Let’s Talk!