The new tax law that took effect January 1, 2018 has implications for nearly all businesses. Some new rules were added and some of the old rules and/or deductions were taken away. Here is a summary of changes that are specific to different business types and a listing of general business changes.
C Corporations Rate Change
The corporate income tax brackets ranging from 15% – 39% were repealed. Starting in 2018, all C corporation income will be taxed at a flat 21% rate. This is a major cut for professional service corporations.
Sole Proprietors, Farmers, LLC and partnership owners, and S Corporation shareholders – New Deduction 199A
Now to the most complicated part of the new legislation. There is a new deduction allowed of up to 20% of Qualified Business Income. The deduction is taken after your Adjusted Gross Income (AGI) is figured and does not lower AGI. This is a big deal!
The deduction is based on your Qualified Business Income (QBI). QBI means ordinary income from any active trade or business as a sole proprietor or farmer. Also, it means ordinary income from pass-through entities like Limited Liability Companies (LLC), S Corporations, or partnerships. QBI does not include interest, dividends capital gains, or foreign-earned income. In addition, QBI does not include wages paid to an S Corporation owner or guaranteed payments to a partner.
There are many limitations to the deduction. Here are the Highlights of the limitations:
- 20% of QBI is the maximum deduction possible.
- The deduction cannot be greater than 20% of total taxable income after capital gains are removed on your personal income tax return. So, if you report a large profit from one business on your personal tax return and an equal loss from another business on your tax return your deduction is zero.
- For Married couples with an AGI greater than $315,000 or single filers with AGI greater than $157,500, the deduction is limited to a percentage wages paid or wages and/or fixed assets in the business.
- For professional service providers like medical professionals, attorneys, financial service professionals and consultants, the deduction starts to phases out starting at $315,000K for married couples and $157,500 for single filers. The law does not at this time limit the deduction for engineers or architects. That may change though as there will be corrections to the bill.
Please note that there are no regulations yet that further define this new law. There will be adjustments and tax planning opportunities will change with each change.
As complicated as this deduction is, it will be very beneficial to our clients who own businesses. As more information and regulations are released later in 2018 on this deduction we will be in touch.
Changes For All Businesses
- The domestic production deduction was repealed.
- Bonus depreciation is increased to 100% through 2022 and then will be phased out over four years.
- The 179 deduction was increased to $1,000,000 starting in 2018. It is indexed for inflation.
- There are limits on the amount of interest that can be deducted for taxpayers with gross receipts greater than $25 million.
- Like-kind exchanges are no longer allowed for personal property. Real property exchanges are still allowed.
- Net operating losses are only allowed to the extent of 80% of future taxable income. Also, the two year and special carrybacks have been repealed. NOLs can be carried forward indefinitely. Farmers are still allowed a 2-year