Tax Cuts and Jobs Act Implications
By Brian LangSS&C Solutions, Inc.
On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act,” a substantial update to the income tax code and the largest major tax reform in 30 years.
Frequently asked questions regarding how the “Tax Cuts and Jobs Act” affects a business.
Q: I’ve read that the tax rate for corporations has been reduced. How will that impact my business? A: One of the most significant provisions of the new tax act was to reduce the income tax rate for corporations to 21%. This new rate applies to entities that are taxed as C Corporations and therefore won’t apply to many small businesses, which are set up and taxed as pass-through entities.
Q: I own a small business that is set up as an LLC. How will my tax rate be impacted by the changes?A: Generally, the 20% deduction for qualified business income (QBI) cannot exceed 50% of your allocable share of the W-2 wages paid with respect to the business or 25% of wages and 2.5% of your adjusted basis in the property of the business, which is intended to help real estate investors.
The intent of the 20% QBI deduction is to lower the effective tax rate on business income that is reported directly on the business owner’s individual income tax return. This is an attempt to lower the tax rate on small business income to a rate that is similar to the rate which applies to C Corporations.
There is also a second limitation to be aware of. For taxpayers with taxable income above $157,700 ($315,000 for joint filers), the 20% deduction will not apply to income generated from “specified service” business income. Specified service income is income earned in the fields of health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners. This essentially means that if you earn business income from one of these fields, the 20% deduction phases out and becomes entirely unavailable when your income exceeds a certain level.
Q: Did the new tax act make any changes related to expensing of equipment used in my business?A: Yes, the new act eased the rules related to expensing of equipment and allowed for instant expensing in most situations.
Under the new law, a 100% first-year deduction is allowed for qualified new and used property acquired and placed in service after September 27, 2017 and before 2023.
The new expensing provisions do not apply to real property such as buildings, land and other real property.
Q: Are there any other provisions that might have an impact on my business?A: The new law eliminated the 50% deduction for business-related entertainment expenses. This will negatively impact the deductibility of entertainment expense that a business incurs with respect to entertaining customers, vendors or employees where a deduction might previously have been allowed.
The new law included substantial changes to current rules for both businesses and individuals. Accordingly, you should consult with your tax advisor for how the new law will impact your individual situation. There are several planning opportunities that you should work with your tax advisor to take advantage of as soon as possible.
Brian Lang, CPA, CVA, CEPA, is a partner at SS&C Solutions, Inc. who serves clients through management consulting, income tax preparation and planning.