The Tax Cuts and Jobs Act (TCJA), made tax law changes that affected every business. Deductions, depreciation, tax credits, and corporate tax rates will make filing taxes different for you and your clients this year. Generally speaking, most of your business clients will do well under the TCJA, but there are a few tax breaks that have been lowered or eliminated. Here’s what you need to know.
Changes for Corporations
Corporations will feel the biggest impact from TCJA, primarily in a positive way. Pre-TCJA, corporate tax rates were similar to individual tax rates, in that the rate depended on profits and income. Back in 2017, corporate rates ranged from 15% to 39% (except for personal service corporations, which were taxed at 35%). Under TCJA, C Corporations are now taxed at a flat rate of 21% (including personal service companies). In addition, corporations are no longer required to calculate alternative minimum tax rates, however, they may be able to use AMT credit carryovers until 2021.
If your corporate clients received dividends from other corporations, they are still allowed to partially deduct those dividends, however not as much as before TCJA. If a corporation owns at least 20% of the stock of another corporation, the deduction is lowered from 80% to 65%. Likewise, deductions for less than 20%, reduce the deduction from 70% to 50%.
Changes for Pass-through Businesses
Before TCJA, taxable income from sole proprietorships, partnerships, S corporations, and LLCs were simply passed through to owners and taxed at those individuals’ standard rates. Under TCJA, pass-through businesses will still be taxed at individual rates, minus a deduction of up to 20%. The deduction was created to lower the tax rate for these non-corporation businesses, but there are some stipulations.
The deduction must be equal to 20% of the “qualified business income (QBI)” earned from the business, however, much of the business’s income is excluded from QBI which gives your clients a smaller deduction. QBI is considered income from sales minus expenses which includes salaries paid to owners. Also, QBI doesn’t include interest, dividends or capital gains from property sales. The deduction is also restricted to the lesser of 20% of QBI, or 50% of the total W-2 wages paid by the business.
In addition, 20% may not apply for businesses where “the principal asset is the reputation or skill of one or more of its employees or owners.” Per, the IRS that includes services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, and trading. These businesses are limited by specific threshold amounts depending on how individual taxes are files.
Other Changes for All Businesses
- For certain business assets that depreciate over time, such as equipment, computer software and buildings, the TCJA allows 100% expensing for business property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. According to the IRS, the 100% allowance mostly decreases by 20% per year in taxable years beginning after 2022 and expires Jan. 1, 2027.
- Under Section 179, business owners can deduct the cost of certain property as an expense when the property is placed in service. The TCJA increased the maximum Section 179 expense deduction from $500,000 to $1 million. The TCJA also expanded the definition of what qualifies under Section 179 and now includes improvement property and some improvements to nonresidential property, such as roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; and security systems.
- Although the TCJA eliminates most deductions for entertainment expenses, business owners can still deduct 50 percent of the cost of business meals only if the actual taxpayer or employee of the taxpayer is present and the food or beverages are not lavish or extravagant. Meals must be provided to a current or potential business customer, client, consultant or similar business contact and are not allowed if the meals are purchased separately from the event.
Understanding the tax saving potential for corporations and pass-through business entities can help your clients make smarter business decisions year-round. Reach out now with a quick reminder email or letter about the new tax laws, so they’re better prepared come April.