Business Summary of Tax Cuts and Jobs Act

Below is a summary of some of the key Business Provisions of the Tax Cuts and Jobs Act that went into effect January 1, 2018.  Some of the provisions are made permanent, while others apply to the next 10 years.

Tax Rates – “C” Corporations will have a flat tax rate of 21%.

Prior to the new law, corporations had graduated tax rates from 10% – 35%.

Pass-Through Income Deduction – Individuals that receive income from an S-Corporation, LLC, Partnership or sole-proprietorship, will be allowed a deduction of up to 20% of the qualified business income.  The deduction will be taken at the individual level.

The deduction does not apply to high-income taxpayers receiving pass-through income from service businesses (doctors, dentists, attorneys, accountants, etc.) or other investment-type activities.

Prior to the change, all income from pass-through activities was taxed at the individual’s tax rate (10%-39.6%).  The law effectively lowers the tax rate on pass-through income to that of corporations. 

Domestic Production Activities Deduction (DPAD) – The domestic production activities deduction is repealed for tax years beginning after December 31, 2017.

The DPAD was a deduction of up to 9% of qualified income for domestic businesses that are involved in a wide range of production related industries.  

Depreciation Deductions   

Section 179 – For property placed into service after December 31, 2017, taxpayers may elect to expense up to $1 million.  The election begins to phase-out once a taxpayer places $2.5 million of assets into service during the year. The election applies to both new and used qualifying property.

Prior to the new law, Section 179 expensing was limited to $500,000 & phase-out began at $2 million.

Bonus Depreciation – Bonus depreciation has been retroactively increased to 100% for assets placed into service between September 27, 2017 and January 1, 2023.  Bonus depreciation applies to both new and used property and does not phase-out based on assets purchased during the year.

Prior to change, bonus depreciation was limited to 50% and applied only to new property.

Alternative Minimum Tax (AMT) – The AMT has been repealed for corporations for tax years starting after December 31, 2017.

Like-Kind Exchange – The ability to defer gains and losses on the exchange of similar property will be limited to exchanges of real property (real estate) that is not held for resale.

Prior to the new law, like-kind exchange treatment was applied to the exchange of real property and personal property (equipment, vehicles, etc.).

Meals and Entertainment – The deduction for meals will remain at 50%; while the deduction for entertainment has been eliminated.

Previously, both meals and entertainment were allowed as 50% deductions.

Cash Basis of Accounting – Taxpayers can use the cash basis of accounting if they satisfy the $25 million gross receipts test, regardless of industry.

Prior tax law required taxpayers with gross receipts over $10 million, or the need to account for inventory, were required to file their tax return using the accrual basis of accounting.

Many businesses are hosting holiday parties for employees this time of year. It’s a great way to reward your staff for their hard work and have a little fun. And you can probably deduct 100% of your 2017 party’s cost as a meal and entertainment (M&E) expense. Next year may be a different story.

The 100% deduction

For 2017, businesses generally are limited to deducting 50% of allowable meal and entertainment expenses. But certain expenses are 100% deductible, including expenses:

• For recreational or social activities for employees, such as holiday parties and summer picnics,

• For food and beverages furnished at the workplace primarily for employees, and

• That are excludable from employees’ income as de minimis fringe benefits.

There is one caveat for a 100% deduction: The entire staff must be invited. Otherwise, expenses are deductible under the regular business entertainment rules.

Additional requirements

Whether you deduct 50% or 100% of allowable expenses, there are a number of requirements, including certain records you must keep to prove your expenses.

If your company has substantial meal and entertainment expenses, you can reduce your 2017 tax bill by separately accounting for and documenting expenses that are 100% deductible. If doing so would create an administrative burden, you may be able to use statistical sampling methods to estimate the portion of meal and entertainment expenses that are fully deductible.

Possible changes for 2018

It appears the M&E deduction for employee parties — along with deductions for many other M&E expenses — will be eliminated beginning in 2018 under the reconciled version of the Tax Cuts and Jobs Act. For more information about deducting business meals and entertainment, including how to take advantage of the 100% deduction when you file your 2017 return, please contact us.

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Projecting your business income and expenses for this year and next can allow you to time when you recognize income and incur deductible expenses to your tax advantage. Typically, it’s better to defer tax. This might end up being especially true this year, if tax reform legislation is signed into law.

Timing strategies for businesses

Here are two timing strategies that can help businesses defer taxes:

1. Defer income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.

2. Accelerate deductible expenses into the current year. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before December 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.

Potential impact of tax reform

These deferral strategies could be particularly powerful if tax legislation is signed into law this year that reflects the nine-page “Unified Framework for Fixing Our Broken Tax Code” that President Trump and congressional Republicans released on September 27.

Among other things, the framework calls for reduced tax rates for corporations and flow-through entities as well as the elimination of many business deductions. If such changes were to go into effect in 2018, there could be a significant incentive for businesses to defer income to 2018 and accelerate deductible expenses into 2017.

But if you think you’ll be in a higher tax bracket next year (such as if your business is having a bad year in 2017 but the outlook is much brighter for 2018 and you don’t expect that tax rates will go down), consider taking the opposite approach instead — accelerating income and deferring deductible expenses. This will increase your tax bill this year but might save you tax over the two-year period.

Be prepared

Because of tax law uncertainty, in 2017 you may want to wait until closer to the end of the year to implement some of your year-end tax planning strategies. But you need to be ready to act quickly if tax legislation is signed into law. So keep an eye on developments in Washington and contact us to discuss the best strategies for you this year based on your particular situation.

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