Tax planning for businesses in the year ahead
The landmark passage of the Tax Cuts and Jobs Act (TCJA) in late 2017 brought the most significant changes to the tax landscape we have seen since 1986. Previously I have discussed how individuals were impacted by the changes, but businesses could also have significant adjustments to make for the year ahead.
C Corp or S Corp?
One area particularly affected by the TCJA was how corporations and business entities choose to classify themselves, namely as either C Corporations (with profits taxed separately from the company's owners) or S Corporations (pass-through entities). With the TCJA, a much lower, corporate tax rate of 21 percent took effect--down from 35 percent--which had a direct and very positive impact on C Corporations, and left many S Corporation owners considering changing to C Corporation status to take advantage of such a significant reduction.
But that cannot be the only factor in considering whether to change. For example, does the business qualify for the new 20 percent Qualified Business Income (QBI) deduction? Is the business owner aware of the risk that C Corporation owners could pay two layers of taxes, namely if they are paying wages or paying dividend distributions to themselves? Owners should also be mindful of whether they plan to sell the business in the next few years; if that is the case it could make sense to remain a pass-through entity.
There is also the question of whether the business has or will incur losses. Owners need to take note that in a C Corporation, those losses stay within the business, whereas with an S Corporation the losses could be used to offset other personal income. With C Corporations, no such benefit exists. Again, restructuring the corporate classification is not always the easiest decision; all relevant facts and circumstances should be carefully weighed in order to make the appropriate decision.
When the TCJA passed, significant deductions were expanded for asset acquisitions through both bonus depreciation as well as depreciation deductions through Section 179 of the IRS Tax Code. Bonus depreciation for property acquired and placed in service in 2018 is equal to 100 percent of the cost of the eligible property. The original use of the property must begin with the taxpayer; however, used property acquired by the taxpayer is also now eligible for bonus depreciation. Prior to TCJA, bonus depreciation was limited to 50 percent of the cost, which then phased down even further in subsequent years. Under the new law, the 100 percent deduction will phase down ratably to 20 percent in the year 2026. There are strict rules in place defining "eligible property," so taking advantage of these favorable rules should be done carefully.
In addition to favorable bonus depreciation rules, businesses also have the option of immediately expensing the cost of certain eligible property under Section 179. The maximum amount that can be expensed under this section is $1 million; however, please note this threshold is subject to other limitations. Also note that some states have decided to "opt out" of allowing Sec. 179 expensing and bonus depreciation. As a result, businesses might find themselves with a favorable federal deduction but not so much for state tax purposes.
Employee benefits
Under the TCJA, businesses are no longer automatically able to deduct certain employee benefits and various other expenses to minimize their tax liability. A number of important employee benefits have now been either eliminated or reduced, including moving expenses, transportation costs, on-site meals and employee awards. There are also new rules governing the treatment and deductibility of certain parking costs or benefits.
Alternatively, the TCJA does provide for a new tax credit for an applicable percentage of the wages paid to qualifying employees for family and medical leave under the Family and Medical Leave ACT (FMLA). The applicable percentage is 12.5 percent of the wages paid during the leave period if the amount paid to the employee is at least 50 percent of the wages normally paid. This percentage can increase up to a maximum credit of 25 percent. The credit is determined based on the employee's normal hourly wage rate; however, if the employee is not paid hourly their wages are prorated to an hourly rate accordingly.
What comes next?
Finally, there is the question of what comes next with tax policy. With the ever-changing political landscape, there is much uncertainty both short and long-term. For now, the prudent approach is to carefully consider the broad net of favorable and unfavorable new tax laws to ensure you are well informed and poised to be in the best possible tax position.
This summary is just the tip of the iceberg in terms of the sweeping new tax laws; however, the intent is to shed light on the significant impact just one change might have on your current or future tax liability or business structure. Taking the time to consider the impact the TCJA might have on your business will not only ensure you're making smart decisions--doing so could very well lead to meaningful tax savings and opportunities.
This article is written by Jay Sattler from The Patriot Ledger, Quincy, Mass. and was legally licensed via the Tribune Content Agency through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.
