Rozes, Gouveia & Company, LLP

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Steven Gouveia, CPA

 

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.
 

 

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Maximize Your 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 limitations.

 

Although official 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 outcome.

 

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.

 

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Take Advantage 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.

 

Determine 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.

 

Monitor State 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.

 

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Contact Us With Questions

401.941.0202 or toll free (outside RI) 888.286.2918

 

Steven D. Gouveia, CPA, ext. 203     

Richard M. Chouinard, CPA, ext. 202     

Brian S. Clavet, CPA, ext. 205              

Donna L. Langevin, ext. 201          

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