Tax Cuts and Jobs Act of 2017:
What’s in it for you in 2018?

By Christine Blankenship, CPA, CTC

Although you’re breathing a sigh of relief now that 2017 is in our rear-view mirror, get ready for 2018.

On December 22, 2017, the President signed the Tax Cuts and Jobs Act of 2017, the most sweeping change to the tax code in 31 years. This creates numerous tax saving opportunities for businesses.

What effect might the new law have on the amount you pay in taxes?

The Act focuses most of its effort on corporate taxes, with a new flat rate of just 21% and various provisions designed to make American businesses more competitive globally. The law also moves in the direction of true “tax reform,” in which involves some deductions which are eliminated in exchange for lower rates. However, the new law gets us nowhere near the dream of filing taxes on a postcard.

In fact, due to the dramatic changes in the tax law, it is more critical than ever to put in place year-round tax planning. Navigating through the rough waters of the 70,000 pages of the tax code is tricky. To reach your business goals and increase your cash flow, NOW is the best time to assess and determine a course of action to take advantage of the tax changes and implement advanced tax reduction strategies.

Taxes aren’t black and white.

What does the new tax reform mean for millions of small business owners? How does it affect your tax planning for 2018? The key areas change with the new tax bill. For example, savings could be in the millions of dollars overnight, depending on your current tax situation. They may also increase slightly. The key is to familiarize yourself with the rules and partner with a seasoned tax planner to ensure you take advantage of every available tax break.

New “C” corporation tax rates

Corporations are big winners in the new law. The “C” corporation’s tax rate will be a flat 21% beginning in 2018. In the past, the tax rate would range from 15% to 35%, based on taxable income. So, this is the time to reevaluate the structure of your company. Are you structured correctly to take advantage of the tax benefits you are entitled to? If you’re paying more than 20% tax, now might be the best time to determine if switching to a “C” corporation, or a dual corporation strategy, may automatically lower your tax.

Section 199A Qualified Business Income Deduction

This is a brand new tax deduction for owners of pass-through entities. So if you are an owner or a part owner of a limited liability corporation (LLC), partnership, sole proprietorship, or “S” corporation, pay attention! This entity structure currently pays no income taxes itself, instead the income from the business passes through to the owners. However, under this reform, the entity may qualify for a 20% deduction of qualified net business income.
Yet there are two obstacles for claiming the 20% deduction.

  1. Specified service trade or business (doctors, lawyers, accountants, artists, actors, athletes, traders, essentially occupations which provide a personal service, with some exceptions).
  • If taxable income is less than the threshold limits of – $157,500 (single) or $315,000 (married filing jointly) – 20 % deduction is fully available.
  • If taxable income exceeds the threshold limits of – $157,500 (single) $315,000 (married filing jointly) – deduction is reduced pro-rata.
  • Unfortunately, the deduction will be completely phased out if taxable income exceeds $207,500 (single) / $415,000 (married filing jointly). Once these limits are reached, there is NO deduction. (But don’t worry, there are many strategies available to help you achieve substantial tax savings.)
  1. All other businesses
  • If taxable income is less than the threshold limits of – $157,500 (single) or $315,000 (married filing jointly) – 20 % deduction is fully available.
  • If taxable income exceeds the threshold limits of – $157,500/$315,000, but less than $207,500/$415,000, then a prorated deduction is available after considering the wage and capital formula below.
  • If taxable income exceeds the threshold limits of – $207,500/$415,000, then the 20% deduction is compared with the wage and capital formula below.
  • The formula for the wage and capital asset limitation deduction amount is lesser of –
  1. 20% of the taxpayer’s qualified business income, taking into consider the qualified trade or business OR
  2. The greater of –
    1. 50% of the W-2 wages paid and deducted through the company, or
    2. 25% of company wages plus 2.5% of the qualified unadjusted basis of qualified property.

The new rules provide opportunities and new planning tools for small pass-through businesses to develop a roadmap to less tax. A roadmap to less tax may include entity selection analysis, recalculation of owner wages, or reclassifying contractors to W-2 employees. Yet, all these strategies must be implemented and maintained properly. Will your business operation create the 20% tax deduction for you? If you are doubtful, reach out to a tax advisor for expert tax planning and advice.

Limits on Business Interest

A new provision for large businesses, with average gross receipts of $25 million or greater, now disallows the deduction of interest expense of more than 30% of its EBITDA, or earnings before interest, taxes, depreciation and amortization. However, disallowed interest can be carried forward up to five taxable years.

100% Bonus Depreciation

The new law makes it possible for businesses to immediately and fully expense depreciable assets in one year, instead of depreciating them over several years. The new law allows for a 100% direct deduction (bonus depreciation) for property/equipment purchased and placed in service. It also permits you to retroactively dial back the clock to September 27, 2017 to find more bonus depreciation. Yet, it is only temporary, expiring on December 31, 2022. Old law allowed up to 100% deduction only in certain circumstances. Bonus depreciation applies to both new and USED property/equipment, where in the past just new property.

Deduction and credits eliminated

New law eliminates or restricts the following business tax deductions and credits:

  • Domestic production activities deduction is repealed
  • Work opportunity tax credit
  • Business entertainment deduction not allowed
  • Net operating loss cut backs and carrybacks prohibited
  • Tax- deferred like-kind exchanges limited to real property

With the elimination of so many business tax breaks, it is imperative for businesses to learn about new opportunities, otherwise the repeal of these types of tax breaks may cause taxes to rise.

U.S. multinational taxes

Changing the current “worldwide” tax system to a “territorial” system. Current system allows U.S. companies to defer paying the US tax until they bring the profits into the US. Many businesses keep capital and profits overseas to avoid paying the tax. Under a territorial system, businesses are taxed on those foreign profits. To encourage US based businesses to bring profits back to the US, an excise tax has been planned that would require companies to pay as much as 14% on assets kept overseas!

In summary, I cannot emphasize enough how important tax planning is to minimize taxes under the new bill. It is essential to develop a road map to be confident that you are taking every available tax break legally. Tying together the business decisions and the tax roadmap takes a team of professionals who look out for your best interest. Tax control of your tax situation and take advantage of the new tax laws. It’s never been a better time to be an American business owner, just make sure you don’t miss out on anything new!