The way businesses' and its owners' calculated their Federal tax have been changed drastically by the new Tax Cut and Job Act bill that was signed into law by President Donald Trump on December 22nd 2017. From a lower tax rate for corporate companies to deductions for qualified business income rates are some of the reasons why people are saying that Tax Cut and Job Act will impact significantly on businesses'.
What do you think are the major key points or provisions of the new Tax Cut and Job Act? This letter will try to answer that question.
Please note that we have designed this letter to answer the questions that have been asked by our clients prior to this time. Furthermore, if the question you have in mind is not answered on this letter, please feel free to contact us.
Do I Need to Convert My Business to a C Corporation?
Prior to the enactment of the Tax Cut and Job Act, C Corporations were subject to a tax rate of 35%, under the new law the tax rate was reduced to 21%. This new tax rate is lower than the individual tax rate of 37%. If as a business owner you decide to convert to C Corporation what this literally mean is that you will be taxed twice (once as corporate body and when and when profit is distributed to Shareholders).
The reason why most people have decided to convert their businesses to C Corporation is because under the new Tax Cut and Job Act provision is made for a reduction in the tax rate. If you are still determined to convert your business to a C Corporation, we will need to analyze your circumstances to determine if conversion to C Corporation is right for you. Also, be rest assured that there are plans and techniques to reduce the effect or sting of converting to a C Corporation.
Will the New Tax Cut and Job Act affect the 2017 tax return of my Business?
Although, most of the provisions on the Tax Cut and Job Act will take effect in 2018, some provisions will affect your business' tax return. One of the first provisions that could affect your business is the; new first year hundred percent depreciation deduction bonus for eligible used and unused assets put in service after September 27th 2017. As a business owner it is left for you to decide if your business should claim the 100% depreciation deduction bonus or stick with the former law which stipulates a 50% deduction for new properties only. This information above shows that for the most part, the new TCJA will not affect your 2017 tax return of your business. If you cannot decide on the right claim to choose for your business, you are at the right place. We can and will help you decide.
Under the new TCJA are there provisions for the Corporate Alternative Minimum Tax?
For C Corporations, there is no provision for Alternative Minimum Tax as it has been annulled by the act; individuals on the other hand are still subject to the stipulated rules of the AMT.
Did my favorite deductions and credits for my business go away?
It is surprisingly possible as the TCJA made provisions for the altering of our favorite deductions and credits. We will try to list out the various notable changes enshrined in the TCJA. Some of them are:
· Domestic Manufacturing and Production income Deduction: Before the enactment of the TCJA, the previous business law made provision for the deduction of a certain percentage of production income gained from the manufacturing and production of goods within the United States. Beginning from 2018, the TCJA has excluded this production deduction from its set of laws.
· Net Operating Losses: there are remarkable changes that have been made to the Net Operating Losses (NOL), some of them include; (i) Limitation of a business' net operating losses to 80% of taxable income. (ii) net operating losses of businesses can no longer be carried two years backward. (iii) Net operating losses of businesses can be carried forward indefinitely.
· Expense of Interest: Beginning from 2018, all businesses form or size notwithstanding will be subjected to an expense on interest disallowance. TCJA further stipulates that all total interest expenses of a business that is more than of 30% of taxable income will not be allowed. However, if the annual gross receipt of your business for the past three years is $25 million or anything less, then the rule above does not apply to your business.
· Entertainment and Meals: this is bad for business owners, the TCJA made no provision for the 50% deduction on entertainment related expenses. For in-house cafeterias, the deductions for provision of meals now have 50% as its deduction limit.
· Additional benefits to Employees: under the new TCJA businesses can no longer deduct the cost of providing transportation related benefits to employees. The TCJA also gives employees the right to remove the benefits from their income. The TCJA stipulates that expenses for transportation equivalent to commuting the employees be deducted.
· Development and Research Credit: it is good to know that under the TCJA provision is made for the preservation of Research and development credit. Also, certain Research and Development expenses like the development of soft ware’s paid after 2021 must be evened out notably after five years.
· Similar Exchanges: Under the new TCJA there is what is regarded as “the like kind exchange principle” and it applies only to properties that are not held especially for sale. Replacement of abandoned properties that were acquired on or before December 31st 2017 are under the TCJA mandated to adhere to the like kind exchange principle.
Under the new TCJA what is the new pass through Deduction rate?
The new "pass through" deduction rate as found in the TCJA is for income of businesses' like sole proprietorships, partnerships, Limited Liability Company and S Corporations. The new law made provision for individuals who fall under the 37% tax bracket to be taxed at 29.6%. The new law also made provision for individuals to deduct up to 20% of their business income, but there are so many terms, conditions and limitations to this deduction, however, you can be rest assured that we will help you determine your eligibility for this 20% business income deduction.
Is 2018 the right year for my business to purchase new Assets?
Yes! But why do we say so? (i) The 100% bonus depreciation deduction (ii) increase in amount of property any qualified tax payer can expense from $510,000 in 2017 to $1 million beginning from January 1st 2018. (iii) If properties over $2.5 million are all being used in 2018, the $1 million maximum limit will ensure that there is a reduction of excess over $2.5 million. (iv) the deduction covers more properties like roofs, fire alarm system, security systems etc.
Are there new tax credits under the TCJA?
The TCJA made provisions for new credits for employers and employees. For employers, there is credit for paid medical and family leave. While for employees, the amount of tax is equivalent to 12.5% of salaries paid out to the employee for medical and family leave. The TCJA also stipulates that employers' pay the minimum of 50% to their employees. Every time an employer pays the minimum of 50% the credit for an employee is raised by 0.25%. If you are wondering how to take advantage of these incentives, we are open for discussion at your free time.
The new Tax Cut and Job Act touches so many areas, all we have done in this letter is scratch the surface. If you have more questions or you need information on how to take advantage of this law, do well to contact us.