The New Tax Law: How Does It Affect Your Year-End Tax Planning?
As the end of 2018 approaches, it time to start thinking about an important date in 2019: April 15, the day federal tax returns are due. The Tax Cuts and Jobs Act (TCJA), passed at the end of 2017, was one of the first major reforms of the tax code in about two decades. Thanks to the TCJA, many businesses in the US are likely to see a reduced tax bill when it’s time to file their returns.
If you haven’t already taken a look at the changes brought about by the TCJA, it’s worth taking a few moments to review them, as they can have an effect on your year-end tax planning.
The Corporate Tax Rate Has Been Reduced
One significant change brought about by the TCJA is the reduction of the corporate tax rate. Previously, the maximum corporate tax rate was 35 percent. Under the new law, it’s been reduced to 21 percent. The 21 percent rate is a flat rate, to be paid by all corporations regardless of their taxable income. Although many of the provisions set forth under the TCJA are set to expire in 2025, the flat 21 percent corporate tax rate is a permanent change.
Certain Businesses Can Claim a 20 Percent Deduction
Another new, significant change brought about by the TCJA is the introduction of Section 199A , which allows certain businesses to deduct up to 20 percent of their qualified business income. It’s worth understanding that the section 199A deduction isn’t available to all businesses and that even some businesses that seem to qualify for it might not be eligible in the long run.
The deduction is available to “pass-through” businesses, such as sole proprietors, S-corporations and partnerships (businesses that “pass” their income through to their owners). If you operate an S corporation or partnership or are a sole proprietor, there might be restrictions that limit your ability to claim that deduction or that keep you from claiming in the first place.
One restriction is the income limit. The amount of the deduction is reduced for people earning more than $157,500 (or $315,000 for married business owners). Your profession can also limit or disqualify you from claiming the Section 199A deduction, even if you operate a pass-through business.
Some Business Expenses are No Longer Deductible
Although Section 199A can mean significant tax savings for particular businesses, it’s worth noting that some expenses that were previously deductible no longer are under the TCJA. For example, in previous tax years, businesses were to deduct 50 percent of the cost of entertainment expenses, such as meals out or tickets to a basketball game. Under the new tax law, certain meals are still deductible, but “entertainment” expenses are not.
Section 179 is More Generous
Section 179, which allows businesses and taxpayers to deduct the cost of certain property and assets in the year the property is placed into service, gets a bit more generous under the next tax law. The deduction limit has increased from $500,000 to $1 million and the phase-out threshold is now $2.5 million (up from $2 million). It’s now possible to include property that was previously excluded from Section 179.
The Cash Method of Accounting is Now Available to More Businesses
Under the new law, more businesses are eligible to use the cash method of accounting. Businesses with annual gross receipts up to $25 million (over the past three years) are now able to switch to the cash method of accounting if they wish.
Changes in How Fringe Benefits and Reimbursements are Taxed
As your business looks back on the benefits it offered employees last year and forward to the benefits it might offer in the future, it’s worth noting how some of those benefits have changed under the new tax law. For example, reimbursements for moving expenses were previously not taxed as income. Due to the new law, those reimbursements now need to be included in an employee’s wages as income. Bicycle commuting expense reimbursements are now also taxed as income under the new law.
The Tax Cuts and Jobs Act has brought with it many changes, which can lead to confusion when it comes to tax planning. The team at New Direction Capital can help you see how the new law affects your business and can work with your company’s CPAs and tax advisors to create a plan for profitable growth under the new law. To learn more, contact us today.
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