When the Tax Cuts and Jobs Act took effect last January, businesses were bewildered by the rampant changes that were to take effect in 2018: New rules for deductions, changes in income and capital gains rates and adjustments to charitable donations were just a few of the most notable amendments. But after a year of sifting through this sweeping tax overhaul, deciphering all of the details and considering the bill’s overall long-term impact, experts have since compiled a comprehensible breakdown.
“When President Donald Trump signed the Tax Cuts and Jobs Act into law last December, it was expected that lowering taxes across the board, eliminating costly special interest tax incentives and modernizing our international tax system so that we can compete with other countries would help create more jobs, increase pay for everyone and make the Internal Revenue Code simpler and fairer for all Americans across the country,” noted John J. Vento, a certified public accountant and certified financial planner who serves as president of Comprehensive Wealth Management in New Dorp. “Some significant changes affecting small businesses took effect January 1 and have been made permanent since.”
Vento, the author of a new book titled “Financial Independence (Getting to Point X): A Comprehensive Tax-Smart Wealth Management Guide,” which discusses the effect of these new tax laws on small businesses in detail, says one of the most significant changes was the corporate tax rate change.
“In 2018, the C corporate tax rate was changed to a flat tax of 21 percent on all corporate profits,” he noted. “This was the most significant tax cut in corporate tax history, which dramatically simplified the corporate tax structure that existed prior.”
The Section 199 deduction for income attributable to domestic production activities was also repealed and business entertainment, as well as country club dues, are no longer tax-deductible.
“As of 2018, net operating losses (NOL) can offset only 80 percent of taxable income and NOL carrybacks will no longer be permitted, with a few exceptions,”
Vento explained. “Existing NOL carryforwards prior to 2018 are unaffected by this change but starting in 2018, you will no longer be required to make an election to waive carryback losses since they will not be permitted. This change will apply on corporate, as well as individual, tax returns.”
The Tax Cuts and Jobs Act also caps the deduction for business losses on individual income tax returns.
“Business losses that exceed the $500,000 threshold for married filing jointly and $250,000 for all other single filers are nondeductible,” Vento said. “The excess loss can be carried forward to future years. This cap applies after the application of the current passive activity loss rules.”
Sexual harassment settlements are not tax-deductible if subject to a nondisclosure agreement and cost of transportation-related fringe benefits, such as mass transit passes and parking, are also no longer tax-deductible. Under the Tax Cuts and Jobs Act, payment of cash, gift cards, and other non-tangible personal property as an employee achievement award is now prohibited and, therefore, not tax-deductible to the business.
“Each of your children can earn up to $12,000 federally tax-free in 2018, so be sure to put them on payroll if they actually work in your business,” Vento said. “And the new law further allows Section 179 expensing for qualified improvement property (including leasehold improvements) made after December 31, 2017. This deduction has been expanded to include roofs, heating, ventilation and air conditioning, fire protection and alarm systems, and security systems.”
Also under the new law, taxpayers with pass-through businesses, such as sole proprietorships, LLCs, partnerships and S corporations, will be able to deduct 20 percent of their pass-through income.
“For example, if your flow-through entity has a profit of $50,000, you will only be taxed on $40,000 (80 percent of the $50,000 profit) at your ordinary income tax rate,” Vento said. “Please note that the full $50,000 will still be included in your adjusted gross income and that this tax break only affects the calculation of tax for federal tax purposes. Something to be very careful about is that the profit does not include any W-2 income paid to an S Corp shareholder or any guaranteed payments to partners through a partnership or limited liability company.”
According to Vento, this pass-through entity tax break does come with some strings attached to “specified service trades and businesses,” which includes any trade or business in the field of health, law, consulting, accounting, performing arts, actuarial services, athletics, financial services, and brokerage services, and any trade or businesses where the principal asset (goodwill) of the business is the reputation or specialized skills of one or more of its employees or owners.
“These flow-through entities will have this tax benefit phase out if their personal taxable income is between $157,500 and $207,500 for single filers and between $315,000 and $415,000 for married filing joint filers (in 2018),” the CPA said. “In other words, they will get the full tax break if their personal taxable income is below this range, a partial deduction if they fall within this range, and no tax break at all if they are above this range.”
And all of these changes point to big adjustments for small business owners.
“The Tax Cuts and Jobs Act of 2017 is perhaps the most significant change in our tax laws in history,” Vento concluded.
“With that said, if you have not already done so, you should consult with your tax advisor before the end of the year to ensure you are taking advantage of every new tax-saving strategy available to your small business.”