The 2018 tax reform comes with a long list of major and minor tax changes that when combined can really add up. Some of these changes are beneficial while some may leave you reconsidering how and when you spend your money and what benefits and perks you offer your employees and clients. Here’s a closer look at the most impactful changes.
Corporate Tax Rates
Income tax rates for most C corporations drop from 35% to 21% and professional service-related businesses will also get the 21% tax rate. This varies within income thresholds but is beneficial for most small and mid-sized business owners. However, some small C corporations will pay a bit more as the law discards the 15% corporate rate on the first $50,000 of taxable income.
Qualified pass-through entities such as sole proprietors and farmers who report on Schedules C and F, and qualified partnerships, S corporations, and LLCs who pass their income to the business owner’s personal taxes may now deduct 20% of their income before calculating their taxes. This does not apply to higher earners who earn more than the threshold of $157,000 for individuals and $315,000 for joint returns.
Tax planning is a must for all Stone Mountain and Atlanta metro business owners. When it comes to planning when to purchase assets, now is the time. From tax year 2018 to 2022 qualified assets no longer have to be depreciated and can be written off at 100%. After 2022, the depreciation will phase out 20% per calendar year. The cap is $1 million dollars.
Some items will still be depreciated such as farm equipment, but it can now be depreciated over 5 years instead of 7. There are no changes to the depreciation of real estate.
Also note that the eligible expenses for depreciation have expanded a bit so make sure that you understand what qualifies and what doesn’t. Your NTRC accountant will help with this.
Now is the ideal time to invest in new company vehicles as the depreciation cap has drastically increased. The first year is capped at $18,000, $16,000 the second year, and $9,600 the third year. This only applies to vehicles purchased after September 27, 2017 and put into business in 2018—or any cars purchased in 2018. The bonus depreciation for heavy SUVs and heavy pickup trucks is 100%.
Major Write-Offs And Deduction Changes
While tax law changes a bit each year we have grown accustomed to being able to track and deduct more not less. However, there are some major deductions changes in 2018:
Write-Offs—businesses can no longer write-off 50% of their business-related entertainment costs. This means no more taking clients or your team to shows, out to golf, or to sporting events without paying full price. Holiday parties can still be deducted. Employee meals while traveling for business can still be written off. Employee cafeterias were once fully deductible but are now only 50% deductible, and by 2025 you won’t be able to deduct the cafeteria at all.
Commuter Benefits Slashed—employers can no longer deduct the cost of employee parking, mass transit passes, or other commuter payment/reimbursement. However, employees can still apply up to $260 per month in pre-tax money to cover their parking, mass transit, vanpool, and other commuter expenses. The one exception to commuter benefits is for companies who subsidize employees up to $20 per month for riding their bikes to work. However, cyclists will now be taxed on the $20 they receive from their employer which is a change.
Sexual Harassment Settlement Amounts Not Deducted—businesses used to be able to deduct all legal fees and settlement amounts for sexual harassment claims that are subject to a nondisclosure agreement. If a nondisclosure is present businesses can no longer deduct these costs.
Made In The USA—you can no longer write-off 9% of income derived from U.S. production activities. However, if your fiscal year straddles 2017 and 2018 you may be eligible for this deduction for the 2018 tax year.
Net Operating Loss—the deductions for NOLs have been drastically reduced. NOLs can only offset 80% of taxable income for future years. NOL carrybacks are prohibited, but NOLs can be carried forward indefinitely. If your fiscal year straddles 2017 and 2018 you may be able to apply 2017 tax laws to 2018.
Firms that provide paid family or medical leave will benefit from a 12.5% tax credit. This is a temporary credit only available for the tax years of 2018 and 2019. Some restrictions apply, as you must pay employees at least half of their normal wage while on leave. You must also have a written policy in place that provides full-time employees no less than two weeks paid family or medical leave. This can be prorated for part-time employees. There are also caps for employee wages.
Capping Business Losses
Business losses are now capped at $250,000 for individuals and $500,000 for joint returns. Restrictions apply but excess can be carried forward.
Like-kind exchanges are now only applied to real estate and can no longer be applied to heavy equipment, personal property, or artwork.
New Cash vs. Accrual Threshold
Previous tax law stated that C corporations with average gross receipts of $5 million or more for the past 3 tax years could not use the cash method of accounting. However, the new law increases this threshold to $25 million dollars. The same applies to partnerships or LLCs with C corporation owners.
As you can see there are a significant number of changes, certainly too many to attempt to navigate it alone. Reach out to the accounting team at NTRC to discuss your long-term tax plan and your 2018 taxes.