Tax Cuts and Jobs Act Planning
Letter for Business Clients
Over the past six
months, we've digested the many tax law changes brought by the Tax
Cuts and Jobs Act (TCJA). From a significantly lower corporate tax
rate to a new deduction for qualified business income, the TCJA
brings a host of planning opportunities for your business. This
letter presents some tax planning ideas under the TCJA for you to
think while there's sufficient time left in
2018 to take tax-saving actions.
Qualified Business Income Deduction - You may have heard a lot of talk in the news
about a new deduction for "pass-through" income, but it's actually available for qualified business income
from a sole proprietorship, as well as from pass-through entities
such as partnerships, LLCs, and S corporations. Under the TCJA,
business owners may deduct up to 20% of their qualified business
income; however, the deduction is subject to various rules and
guidance is lacking on this new deduction, there are some planning
strategies that can be considered now. For example, there are ways to
adjust your business's W-2 wages to maximize your qualified business
income deduction. Also, it may be helpful to convert your independent
contractors to employees, assuming the benefit of the deduction
outweighs the increased payroll tax burden. Other planning strategies
include investing in short lived depreciable assets, restructuring
the business, and leasing or selling property between businesses. We
will work with you to determine which strategies produce the best
Acquire Assets - Thanks to the TCJA, this is a great time to
acquire business assets. Your business may be able to take advantage
of very generous Section 179 deduction rules. Under these rules,
businesses can elect to write off the entire cost of qualifying
property rather than recovering it through depreciation. The maximum
amount that can be expensed this year is $1 million (up from $510,000
for 2017). This amount is reduced (but not below zero) by the amount
by which the cost of qualifying property exceeds $2.5 million (up
from $2.03 million for 2017). But, there's more good news. The Section
179 deduction is now available for certain tangible personal property
used predominantly to furnish lodging and certain improvements to
nonresidential real property (roofs, HVAC, fire protection systems,
alarm systems, and security systems).
Note: Watch out if your business is already expected to
have a tax loss for the year (or close) before considering any
Section 179 deduction. This is because you can't claim a Section 179
write-off that would create or increase an overall business tax loss.
Above and beyond the
Section 179 deduction, your business also can claim first year bonus
depreciation. The TCJA establishes a 100% first year deduction for
qualified property acquired and placed in service after 9/27/17 and
before 1/1/23 (1/1/24 for certain property with longer production
periods). Unlike under prior law, this provision applies to new and
used property. The bonus percentage will phase down for years 2023
through 2026. Note that 100% bonus depreciation deductions can create
or increase a Net Operating Loss (NOL) for your business's 2018 tax
year. Under the TCJA, the NOL generally can't be carried back to an
earlier tax year. However, it can be carried forward indefinitely.
Unfortunately, NOLs arising in tax years beginning after 2017 can't
reduce taxable income by more than 80%.
Given these generous provisions, your asset acquisition plan is more
important than ever. If you're planning on acquiring a business, we
suggest you pursue an asset acquisition rather than a stock deal.
Also, there may be reasons to elect out of bonus deprecation or use
different expensing techniques in individual tax years.
of Minimum Tax Credit Carryovers - Starting in 2018, the TCJA repeals the
Alternative Minimum Tax (AMT) for C corporations. If a corporation
paid AMT in prior years, it may have generated a Minimum Tax Credit
(MTC). Before the TCJA, corporations could use MTCs to offset their
regular tax liability in a later year. Any unused credit was
nonrefundable and carried forward indefinitely. Thanks to the TCJA,
corporations may now use MTCs to offset regular tax for any tax year.
Also, corporations may be refunded up to 50% of their MTCs for tax
years beginning after 2017 and before 1/1/22. For tax years after
2021, any of the corporation's unused MTC is fully refundable.
Eligibility for Credit for Employer-paid Family and Medical Leave - The TCJA establishes a new credit for
employer-paid family and medical leave. The credit is for tax years
beginning in 2018 and 2019 and is equal to 12.5% of the amount of
wages paid to qualifying employees on family and medical leave.
However, the employer must pay at least 50% of the wages normally
paid to the employee. The credit is increased by 0.25 percentage
points (but not above 25%) for each percent by which the payment rate
exceeds 50%. This could be a valuable incentive for your business.
Watch out for
New Business Interest Expense Limit - Regardless of its form, every business will be
subject to a net interest expense disallowance. Starting in 2018, net
interest expense in excess of 30% of your
business's adjusted taxable income will be disallowed. However, your
business won't be subject to this rule if its average annual gross
receipts for the prior three years is $25 million or less. Also, real
property trades or businesses can choose to have the rule not apply
if they elect the Alternative Depreciation System (ADS) for real
property used in their trade or business. Since ADS is a slower way
to depreciate property, real property trades or businesses will need
to look at the trade-off between currently deducting their business
interest expense and deferring depreciation expense.
Response to Tax Reform -
States react differently to changes to federal tax law. For example,
some states automatically conform to federal tax law as soon as
legislation is passed. Other states require their legislatures to
adopt federal tax law as of a fixed date. This generally occurs on an
annual basis. There are some states, however, that pick and choose
which federal provisions to adopt. Because of this, your state income
tax rules may be drastically different than the federal income tax
rules. For example, some states may not adopt the new 100% bonus
depreciation rules or the NOL rules.
Conclusion - As we said at the beginning, this letter is to
get you thinking about tax planning moves for the rest of the year.
This year is definitely unique given the
numerous tax law changes brought by the TCJA. Even with uncertainty
about some of the TCJA's provisions, there are things you can do to
improve your business's situation.