The Tax Cuts and Jobs Act of 2017 will affect how much tax you owe in 2018. Understanding how these changes affect your taxes may help you make changes now to reduce the taxes you pay. It is also important to make sure you are properly paying your quarterly estimated tax payments. Contact me for a free initial consultation and I will help you understand how the changes may affect your business and I will show you how a proper planning engagement can lead to big savings on your tax bill. In this article I will summarize the key points of the changes. I will follow-up with more detailed posts regarding the more complex changes.
Deduction for Qualified Business Income
Business owners of S corporations, partnerships or sole proprietorships can now receive a deduction of up to 20% of their qualified business income (This applies to LLCs as well. They are taxed as one of the three types mentioned). Qualified business income is generally the net income derive from a US trade or business. It will not include income from any income from investments, interest, dividends, or commodities trades. This deduction is also available for trusts and estates that receive pass through income.
The deduction will begin to phase-out once your income passes $157,500 ($315,000 if married filing jointly). The method of phase out depends on the type of business you are engaged in. If you are bit in one of the specified services business then your deduction will be limited by wages paid or a combination of wages and original basis in qualified property (this can be a big help for Real Estate owners). If you are in a specified service business then the deduction will begin to phase out completely as you pass the threshold. If you are close to the income threshold I recommend professional help to build an appropriate strategy to maximize your deduction.
I am still reviewing the effects on agricultural cooperatives and I will provide an update on this area soon.
Expenses and Depreciation
Changes to Bonus Depreciation
Property purchased after September 27th, 2017 and placed into service between September 28th 2017 and December 31, 2022 is now eligible for bonus depreciation of 100%. Used property also qualifies for bonus depreciation as long as this is the first time it has been placed in service by you. As always, depreciation calculations remain complex and determining the best use of bonus depreciation depends on your circumstances.
Changes to Section 179 Expenses
The §179 expense limit has been raised from $510,000 to $1 million. In addition, the phase-out threshold has been raised from $2.03 million to 2.5 million. For most small business
Depreciation limitations have been increased for listed property (§280F). For cars, trucks, and vans purchased and placed into service in 2018 the first year deduction is $18,000 ($10,000 without special depreciation). Second year depreciation is now $16,000, third year is $9,600, and remaining years are $5,760. Remember that the amount of deductible depreciation is dependent on percentage of business use for the vehicle.
Net Operating Loss
The deduction for a business net operating loss is now limited to 80% of taxable income. In addition, the loss can no longer be carried backward. However the loss can be carried forward indefinitely (until used up) instead of being limited to 20 years.
Entertainment Expense Deduction
Expenses for any activity generally considered entertainment are no longer deductible. Previously, if the activity was shown to be directly connected to a trade or business, then you were able to deduct the expense (subject to the 50% limitation. This is no longer the case. If you take your clients to a football game, then you cannot deduct the cost of the tickets. I have had a lot of misinformation about this already. Some have claimed it can be a promotional expense. That is incorrect and the kind of advice that is likely to get you into trouble. Regardless of what you call it, the expense is not deductible.
More to Come
The are several sections I have not touched on yet and several areas that require a more in-depth treatment. To understand how these and other areas affect your personal situation contact me for help. Do not rely on this post when preparing or planning your taxes.